Should We Talk Money? The Behavioral Role of Measurement Basis in Budgetary Practices

• In Event: Honesty in Budgeting

Abstract

In this paper, we conduct two experiments to investigate the effect of the measurement basis of budgets (i.e., whether a budget is expressed in monetary or nonmonetary metrics) on managerial behavior. Drawing on psychological theory, we posit that a monetary measurement basis reinforces the notion of money and thereby increases managers’ concerns for self-interest. This increased self-focus can have a positive effect on firm outcomes if managers’ self-interest is aligned with firm interest, but a negative effect otherwise. Consistent with our predictions, our first experiment shows that, in budget reporting tasks, using monetary units as the measurement basis increases managers’ desire for money and in turn lowers honesty in reporting, despite the fact that managers’ economic incentives are independent of the measurement basis. By comparison, our second experiment shows that, in budget-based production tasks, performance is generally better when budget targets are expressed as divisional profit than divisional productivity, even though the budget targets are economically equivalent. The implications of our study for management accounting research and practice are discussed.

Authors

• Bryan Church, Georgia Institute of Technology

• Jason Kuang, Georgia Institute of Technology

• Yuebing Liu, Georgia Institute of Technology