Updated Theory and New Evidence on the Effect of Information System Precision on Managerial Reporting

• In Event: Monitoring

Abstract

Participative budgeting is an important element of many firms control systems. However, there is conflicting research on how the degree of information asymmetry (an antecedent of participative budgeting) affects a subordinate’s propensity to create budgetary slack. A foundational study on slack in participative budgeting, Hannan, Rankin, and Towry (2006; “HRT”) provides early empirical evidence and suggests that increasing the precision of a superior’s information system, which reduces information asymmetry, increases slack creation. More recently, in a slightly different setting, Abdel-Rahim and Stevens (2018) fail to replicate the directional findings of HRT. Using results from the extant literature that followed HRT on how non-pecuniary incentives affect privately informed agents’ budgetary reporting, we develop a refined version of the HRT theory that predicts results opposite to those of HRT. We conduct a direct replication of HRT’s original experiment and find results that are directionally inconsistent with HRT, but consistent with our refined theory. Our theory and results suggest that the important effect of information system precision on budgetary slack creation may differ from that suggested by prior research. We also suggest practical and academic implications of our study.

Authors

• Jeremy Douthit, University of Arizona

• Michael John Majerczyk, Georgia State University

• Lisa McLuckie Thain, University of Arizona