Friendships Matter: The Behavioral Effects of Social Distance and Residual Claim Distribution on Budget Reporting in Hierarchical Organizations

• In Event: Budgeting

Abstract

In this paper, we focus on the honesty of subordinates’ budget reporting in multi-level (subordinate, manager, and owner) hierarchical organizations. We experimentally investigate how subordinates’ honesty is jointly influenced by their perceived social distance from the manager and the distribution of residual claim between the manager and owner. We predict and find that, when the manager has a relatively large stake in the residual claim, low social distance between the subordinate and manager increases the subordinate’s honesty level, and this effect is fully mediated by the subordinate’s increased concern about the manager’s well-being. However, when the manager has a small stake in the residual claim, low social distance between the subordinate and manager decreases the subordinate’s honesty level, and this effect is partially mediated by the subordinate’s reduced concern about the manager’s impression of their behavior. We discuss the implications of our findings for management accounting theory and practice.

Authors

• Jason Kuang, Georgia Institute of Technology

• Michael John Majerczyk, Georgia State University

• Di Yang, UNSW Sydney