Management Accounting Section Midyear Meeting

Burn It or Return It? The Effects of Uncertainty and the Possibility to Return Budget on Capital Budgeting

• In Event: Budgeting and Misreporting

Abstract

This paper uses an experiment to investigate the effects of giving subordinates the possibility to return remaining budget at the end of a period to the organization on the capital budgeting process and its outcomes. We predict and find that when subordinates face low uncertainty at the moment they submit their budget request, giving them the possibility to return budget increases their budget requests compared to not having this possibility. However, under higher uncertainty, this effect is mitigated such that budget requests no longer increase. We also predict and find that when subordinates have the possibility to return budget, they use this possibility more often and return more budget under high than under low uncertainty. Together the results imply that the possibility to return budget decreases subordinates’ effective slack consumption under high uncertainty but increases it under low uncertainty. We contribute to the budgeting literature by integrating an important feature of budgeting processes in practice into research, i.e., subordinates’ possibility to return unused budget. We provide evidence that giving subordinates this possibility affects capital budgeting processes and outcomes differently depending on the level of uncertainty subordinates face at the moment of their budget requests. Our findings also imply that in some situations, it may be useful for firms to adopt a “use it or lose it” budgeting policy.

Authors

• Florian Elsinger, RSM Erasmus University

• Markus C. Arnold, University of Bern

• Kai Alexander Bauch, TU Kaiserslautern