Management Accounting Section Midyear Meeting

The Effect of Horizontal Inequity, Capacity for Budget Slack, and Severity of Peer Overstatement on Managerial Reporting Behavior

• In Event: Break/Research Exhibition 1: Budgeting and Target Setting

Abstract

This study investigates how three factors - horizontal inequity, capacity for budget slack, and severity of peer overstatement affect employees’ decision-making in a peer reporting context. This study contributes to both theory and practice by examining the underpayment and overpayment effect of horizontal inequity in an accounting setting and by addressing the unintentional consequences of implementing a pay transparency policy. The results show that employees report more honestly when they are paid more than their peers compared to when they are paid less than their peers. When facing a misreporting peer, employees paid less than their peers are more likely to blow the whistle than those paid more than their peers. The results also show that employees report less honestly when they have greater ability to misreport and their willingness to blow the whistle increases as the severity of their peer’s wrongdoing increases. In short, the results suggest that a pay transparency policy may result in negative consequences when horizontal inequity exists. Management should consider building an internal whistleblowing system to control employees’ opportunistic behaviors.

Authors

• Yiwen Li, Radford University

• Andrea R Drake, Louisiana Tech University