Management Accounting Section Midyear Meeting

The Effects of Forecast Uncertainty and Time Pressure on Honesty and Hedging in Budget Slack

• In Event: Budgeting and Target Setting (Experimental)

Abstract

Budgets are used as ex ante forecasts for the purpose of planning and resource allocation. In practice, future resource needs are rarely known with certainty at the time the budgets are prepared. In this paper we examine whether certainty or uncertainty about future resource needs impacts budget slack creation and, consequently, the value of the budgets for planning and resource allocation purposes. We also examine whether increasing the time pressure within which budget decisions must be made moderates this effect. The results of two computerized laboratory experiments indicate that relative to certainty about future resource needs, uncertainty increases slack in budgets, but only when there is a monetary incentive to create slack. Imposing time pressure on the budgeting decision reduces this effect. Our results illuminate how two factors common in a budget context, forecast uncertainty and time pressure, impact the usefulness of budgets for planning and resource allocation. Our design also allows us to being to disentangle the impact of dishonesty vs. hedging against uncertainty on budget slack creation.

Authors

• Anne M Farrell, Miami University

• Sean A. Peffer, University of Kentucky

• Kristian Rotaru, Monash Business School

• Axel Klaus-Dieter Schulz, La Trobe University