Management Accounting Section Midyear Meeting

Participative Budgeting: Disaggregate the Plans, the Reports, or Both?

• In Event: Fraud/Misreporting

Abstract

Participative budgeting can improve firms’ planning but will induce agency problems if self-interested managers misstate private information for their own benefit. However, previous literature documents evidence consistent with a social norm of honesty that limits managerial dishonesty. Bicchieri’s social norm theory suggests that contextual cues can increase the likeli-hood that norms are activated. Our experimental results suggest that such cues can be more subtle than previously documented: Managers report substantially more honestly when they are aware of value drivers that underlie reported numbers. We conduct a participative budget-ing experiment in which we manipulate whether a stylized planning process requires managers to deal with the aggregated reporting number only or whether it requires them to also deal with underlying value drivers. Consistent with social norm activation, we find that planning with disaggregated value drivers makes managers report more honestly. In a second step, we investigate how strongly recipients of budget reports rely on reported numbers when they up-date their beliefs about actual values. In the condition in which value drivers are salient, we additionally manipulate whether managers need to include the value drivers in their budget reports. We find that recipients who receive disaggregated reports including the reported number together with the value drivers adjust their ex-post beliefs more strongly to managers’ reports than recipients who receive aggregated reports including the reported number only. This is consistent with support theory that suggests that unpacking information increases its perceived credibility.

Authors

• Dominik Kemsa, Technical University of Munich

• Peter Schaefer, Technische Universität München

• Andreas Ostermaier, University of Southern Denmark