The Effect of Outcome Uncertainty on Budgetary Slack and Risk Sharing: An Experimental Examination

37 Pages Posted: 19 Aug 2017 Last revised: 10 Feb 2019

See all articles by Heba Abdel-Rahim

Heba Abdel-Rahim

University of Toledo

Michael Majerczyk

Georgia State University

Douglas E. Stevens

Georgia State University - Robinson College of Business

James C. Wilhelm

Chapman University, Argyros School of Business and Economics

Date Written: February 6, 2019

Abstract

While managers commonly possess private information regarding future production cost when developing their cost budget, they also face outcome uncertainty regarding that future cost. This outcome uncertainty, however, has largely been ignored by experimental researchers examining various controls for opportunistic budgetary slack. Social norm theory suggests that managers may view outcome uncertainty as an opportunity to evade an honesty norm and thereby increase budgetary slack. Alternately, the theory suggests that managers may view outcome uncertainty as a cue that they are expected to behave responsibly in their fiduciary role and thereby decrease budgetary slack. We test these competing theoretical effects using a participative budgeting experiment found in the literature. We find evidence that, rather than encouraging opportunism in managerial reporting, outcome uncertainty activates a responsibility norm that reduces budgetary slack. Specifically, we find that outcome uncertainty primes some managers to voluntarily share the risk of higher production cost with their principal, which leads to a decrease in budgetary slack relative to an experimental condition with no outcome uncertainty. This study extends the literature in participative budgeting by examining norm behavior under outcome uncertainty and helps explain the continued use of this organizational control in practice.

Keywords: participative budgeting; outcome uncertainty; budgetary slack; risk sharing

Suggested Citation

Abdel-Rahim, Heba and Majerczyk, Michael and Stevens, Douglas E. and Wilhelm, James, The Effect of Outcome Uncertainty on Budgetary Slack and Risk Sharing: An Experimental Examination (February 6, 2019). Available at SSRN: https://ssrn.com/abstract=3022307 or http://dx.doi.org/10.2139/ssrn.3022307

Heba Abdel-Rahim

University of Toledo ( email )

The Accounting Department
College of Business and Innovation
Toledo, OH 43606
United States

Michael Majerczyk (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Douglas E. Stevens

Georgia State University - Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
404-413-7212 (Phone)
404-413-7203 (Fax)

HOME PAGE: http://robinson.gsu.edu/profile/douglas-e-stevens/

James Wilhelm

Chapman University, Argyros School of Business and Economics ( email )

1 University Drive
Orange, CA 92866
United States

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