Managers Use Of Subordinate Budget Submissions: The Development and Consequences of Trust

• In Event: Participative Budgeting

Abstract

Despite the well-documented potential for subordinate misreporting when preparing budgets for planning and control purposes, recent evidence indicates they remain a common element of the management control system employed by organizations of varying size and complexity. As such, there is a disconnect between theory-based shortcomings of budgets espoused by some (e.g., Jensen 2001) and observations from practice that their use is still prevalent (Libby and Lindsay 2010). This study examines two naturally occurring features of the control environment likely to attenuate the extent to which subordinate misreporting in participative budget settings goes undetected: (a) repeated interactions between managers and their subordinates, and (b) managers’ incentives to make good planning decisions (accurate cost forecasts). We use an integrative model of trust development to develop our hypotheses. Results from a lab experiment show that as predicted, repeated budget interactions with the same subordinate allow managers to form accurate perceptions of subordinate trustworthiness. Based on these perceptions managers determine the extent to which they will use subordinate budgets when developing cost forecasts with greater use of budgets from more trustworthy subordinates resulting in more accurate cost forecasts. Incentivizing managers for making accurate cost forecasts strengthens the link between assessments of subordinate trustworthiness and use of their budgets. Moreover, for managers paired with trustworthy subordinates, forecast accuracy incentives also result in forecasts that are more accurate. We discuss the implications of our findings for theory and practice.

Authors

• Joseph G Fisher, Indiana University - Bloomington

• William Timothy Mitchell, University of Waterloo

• Sean A. Peffer, University of Kentucky

• Alan Webb, University of Waterloo