Larissa Kyj ([email protected]) is a Professor in the Rohrer College of Business, Rowan University, and Robert J. Parker an Associate Professor in the Department of Accounting, College of Business Administration, University of New Orleans.

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Abstract

This study explores the causes or antecedents of budget participation to understand more fully the role of participation in the workplace. The study focuses on the reasons why superiors encourage the budget participation of their subordinates and draws upon several theoretical perspectives including leadership theory, agency theory and organizational justice. To examine the issues, a survey was administered to managers and supervisors in several companies. Results of path analysis suggest that superiors encourage subordinate participation when the superior's leadership style is considerate. This implies that budget participation may mediate the relation between leadership style and work outcomes. Results also suggest that superiors encourage participation when budget goals are used in the performance evaluation of subordinates, in which case, the study argues, the superiors encourage participation because of concerns about organizational justice. This finding implies that budget participation may mediate the relation between the evaluative use of budget and those work outcomes that prior research has linked to organizational justice. The proposed relation between information asymmetry and budget participation is not supported.

Budget participation has been the focus of numerous studies in the accounting literature. As noted in Shields and Shields (1998), most studies theorize that budget participation influences organizational and employee outcomes such as motivation, performance, job satisfaction and slack. As they argued, to increase our understanding of the consequences of participation, additional research is required on why budget participation exists in the first place, that is, what are the causes or antecedents of budget participation? Drawing upon several disciplines (economics, psychology and sociology), they propose that participation occurs for a number of reasons such as information sharing, coordinating interdependencies between organizational subunits, and increasing employee motivation and job satisfaction.

The current work further investigates the antecedents of budget participation by focusing on the role of the superior in the budget participation of the subordinate. Drawing upon a number of theoretical perspectives, it is argued that superiors encourage subordinate participation in the budgeting process to foster open relations with subordinates (leadership theory), gain access to information held by the subordinate (agency theory) and promote perceptions of fairness when budgets are used to evaluate subordinates (organizational justice theory). By exploring the reasons why superiors encourage budget participation, researchers may better understand the causes of participation and, consequently, how participation affects workplace outcomes such as performance and job satisfaction.

In this context, drawing upon leadership theory, it is proposed that some superiors foster participation to express the leadership style of the superior. Executives classified as ‘considerate’ attempt to build relations with subordinates that are characterized by mutual trust, respect and support (Fleishman and Harris, 1962; Fleishman, 1998b). As proposed here, such executives may encourage the budget participation of subordinates as part of a leadership approach of fostering open and meaningful communication with subordinates.

Based upon agency theory, executives also may promote budget participation to access private information held by the subordinate. A number of accounting researchers argue that subordinates have private information about their areas of responsibility and that budget participation provides the subordinate with opportunities to share this information with superiors (see literature review by Shields and Shields, 1998). The extent of private information is related to information asymmetry which is the difference between superior and subordinate regarding knowledge of the subordinate's operational area. Shields and Young (1993) report a significant positive relation between information asymmetry and budget participation. This knowledge is extended by testing the proposition that superiors actively encourage budget participation when high information asymmetry exists.

Finally, superiors may foster the budget participation of subordinates to create an atmosphere of fairness and procedural justice. Many studies in organizational justice suggest that individuals seek input into organizational decisions that affect them, especially regarding their performance evaluation (see literature review by Folger and Cropanzano, 1998). Individuals consider such input as fair and just. The current study proposes that when budget goals are used to evaluate subordinates, superiors encourage subordinate input in budget setting for this fairness reason. Superiors have a number of motivations for treating their subordinates fairly. For example, superiors with a reputation for fairness may be more effective managers as their subordinates are more likely to accept the superior's plans (Greenberg et al., 1991).

To investigate the relations proposed here, a survey was distributed within thirteen companies. Seventy managers and supervisors completed the survey, representing a response rate of 61 per cent. Path analysis was used to assess statistically the hypotheses. The results reveal that superiors encourage subordinate budget participation when: (a) the superior's leadership style is considerate; and (b), budget goals are used to evaluate subordinate performance. Further, results indicate that when superiors promote budget participation, subordinates are more likely to participate. Proposed links between information asymmetry and budget participation were not supported.

The findings suggest that budget participation, to some extent, reflects the leadership style of the superior. Budget participation thus serves as a method for superiors to express their leadership approach. It may mediate the relation between leadership style and workplace outcomes such as the job satisfaction of subordinates. The findings also suggest that budget participation is used by superiors to foster perceptions of organizational justice when budget goals are used to evaluate the subordinate. Accordingly, budget participation may mediate the effect of the budgeting variable, evaluative use of budget goals, upon those outcomes that prior research has linked to organizational justice such as job satisfaction and turnover.

THEORETICAL DEVELOPMENT

The theoretical model appears in Figure 1. Within the model, three exogenous variables (leadership style, information asymmetry, and evaluative use of budget) are posited to influence the superior's encouragement of subordinate participation, which, in turn, is linked to the budget participation of the subordinate. As an intervening variable, the encouragement of budget participation helps explain the relation between the exogenous variables and budget participation. The theoretical rationale for each proposed link in the model is discussed separately in the following sections.

Details are in the caption following the image — **Figure 1**
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THEORETICAL MODEL

Leadership Style

Leadership within organizations has been extensively examined in the management and organizational behaviour literatures. As Yukl (1989, p. 253) notes, leadership is a ‘complex, multifaceted phenomenon’ causing researchers to use a wide variety of theoretical approaches in examining it. One of the most commonly used, and also utilized here, is the personal-behaviour or leadership style approach which seeks to identify leader behaviours that are effective in managing organizations. Effectiveness is usually defined in terms of employee productivity, motivation, job satisfaction and turnover (Gibson et al., 1979). Within this stream of research, most studies have used the two-factor conceptualization of leadership style developed in a research program at Ohio State University (Yukl, 1989). In this framework, leadership behaviour is explained using two independent constructs: initiating structure (task-oriented behaviour); and consideration (relationship-oriented behaviour). As Fleishman (1998a) argues, decades of research have proven these constructs ‘to be among the most robust of leadership constructs’ (p. 51). As Judge et al. (2004) noted in a recent meta-analysis, during the last fifty years the constructs have appeared in hundreds of studies which, in general, demonstrate strong empirical links between the constructs and organizational outcomes. They argue that despite their age and critics, the constructs continue to represent a productive conceptualization of leadership.

Regarding leadership style, initiating structure refers to the extent to which a leader ‘structures his [her] own role and those of his [her] subordinates towards goal attainment’ (Fleishman and Peters, 1962, p. 130). High structure indicates that the leader clearly specifies what is expected of subordinates (House and Baetz, 1979). Consideration, which is more relevant to the current study, is ‘the degree to which the leader pays regard to the comfort, well-being, status, and satisfaction of the followers’ (House and Baetz, 1979, p. 360). In their interactions with subordinates, considerate managers promote two-way communication that is characterized by mutual trust (Fleishman and Harris, 1962; Fleishman and Peters, 1962; Fleishman, 1973; Fleishman, 1998b).

Leadership style, with its structure and consideration constructs, has appeared in many accounting studies. Arguably, accounting researchers have borrowed more from this leadership approach than any other. A number of studies have examined the role of leadership style in public accounting firms (e.g., Pratt and Jiambalvo, 1981, 1982; Jiambalvo and Pratt, 1982; Kida, 1984; Kelley and Margheim, 1990; Otley and Pierce, 1995). More relevant to the current study are those accounting studies that have examined leadership style in the context of budgeting issues. An early and influential study in this area is Argyris (1952) who conducted a field study of industrial firms. Argyris notes that managers express their leadership approach, in part, through how they use the budgeting system.¹

Among the first studies to examine the relation between leadership style and budget participation is Brownell (1983), who noted that prior studies in management and organizational behaviour sometimes reported conflicting results regarding the effects of leadership style on outcomes such as job performance and job satisfaction. To resolve these conflicting findings, Brownell proposes that budget participation moderates the relation between leadership style and outcomes. Results of his survey work support this view by providing evidence of interactions between leadership styles and budget participation in their effects on job performance.

While Brownell (1983) argues that budget participation moderates the relation between leadership style and outcomes (such as job performance), the current study proposes that leadership style is an antecedent of budget participation and so, in this framework, budget participation is a mediating variable between leadership style and outcomes. These differing views of budget participation (moderator v. mediator) are not necessarily incompatible. As Frazier et al. (2004) argue, in its effect on an outcome, ‘the same variable could be cast as a moderator or mediator, depending upon the research question and the theory being tested’ (p. 116). Further, as noted in James and Brett (1984), ‘a particular variable may assume the roles of both mediator and moderator in the same model, and even in the same functional relation and equation’ (p. 314).

According to the theoretical framework of the present study, the leadership style of consideration influences the extent to which superiors encourage the participation of subordinates in the budgeting process. Managers with high consideration respect their subordinates and attempt to develop relationships with subordinates that are based upon trust and open communication (Fleishman and Harris, 1962; Fleishman and Peters, 1962; Fleishman, 1973; Fleishman, 1998b). Such managers are likely to encourage subordinates to participate during the budgeting process, thus:

H1:
The superior's leadership style (consideration) has a positive relation with the superior's encouragement of budget participation.

Further, when superiors promote budget participation, subordinates are more likely to actually participate, and hence:

H2:
The superior's encouragement of budget participation is positively related to the budget participation of the subordinate.

Information Asymmetry

Shields and Shields (1998) argue that one of the most important reasons for budget participation is information sharing between subordinate and superior. This includes the sharing of private information held by the subordinate. A number of accounting researchers argue that subordinates have private information about their areas of responsibility (see literature reviews by Baiman, 1990, and Shields and Shields, 1998). This information is private in the sense that the superior cannot access the information or the superior can access it only by incurring significant costs. The extent of private information is related to information asymmetry between superior and subordinate regarding knowledge of the subordinate's area of operation. Budget participation may allow subordinates to reveal their private information which, in turn, could lead to higher job performance by the subordinate and economic gains for the organization (e.g., Christensen, 1982; Baiman and Evans, 1983; Penno, 1984; Young, 1985; Nouri and Parker, 1998).

According to Shields and Young (1993) and Shields and Shields (1998), the greater the information asymmetry between subordinate and superior, the more likely organizations will promote budget participation to access the private information of subordinates. In their sample of controllers at large corporations, Shields and Young (1993) report a significant correlation between information asymmetry and budget participation.

The work here extends Shields and Young (1993) by proposing that superiors encourage the budget participation of subordinates when information asymmetry is high. Superiors do so to access the private information held by the subordinate. This leads to:

H3:
Information asymmetry has a positive relation with the superior's encouragement of budget participation.

In the theoretical model proposed here, information asymmetry is an antecedent of budget participation. By extension, budget participation may be a mediator between information asymmetry and outcomes such as job performance. This view of budget participation does not necessarily conflict with prior studies that theorize that budget participation moderates the relation between information asymmetry and outcomes such as budgetary slack or performance (e.g., Young, 1985; Chow et al., 1988).

Evaluative Use of Budgets

Numerous studies in the accounting literature have examined the use of budgets as performance standards in evaluating subordinates. Of particular relevance here are those prior studies that examine the evaluative use of budgets and budget participation. Two streams of research may be identified by the specification of the relation between evaluative use and budget participation: (a) ‘newer’ studies that model a direct link between evaluative use of budget and budget participation, and (b) ‘older’ studies that do not model a direct link, but specify an interaction between the variables in their effect on outcome variables. The older stream of research was spawned by Hopwood (1972) who reports that emphasizing the achievement of budget goals (i.e., budget emphasis or evaluative use of budget) resulted in high job-related tension for the subordinate; Hopwood further speculated that budget emphasis might adversely affect the subordinate's job performance. In a follow-up study, Brownell (1982) argues that the effect of budget emphasis on outcomes is moderated by budget participation. In his sample, subordinate performance was high when both budget emphasis and budget participation were high. Subsequent related research sought to identify variables that might form three-way interactions with budget participation and budget emphasis in their effect on outcomes (e.g., Brownell and Hirst, 1986; Brownell and Dunk, 1991; Harrison, 1992; Lau et al., 1995; Lau and Buckland, 2000; Lau and Lim, 2002).

The newer stream of research, which is more relevant here, proposes that the evaluative use of budget is an antecedent of budget participation. Among the first to theorize this are Lau and Buckland (2001). They argue that when budget goals are used to evaluate and therefore reward subordinates, subordinates seek to participate in the budget setting process to influence the budget goals. In their sample of employees, budget emphasis had a significant direct link with budget participation. Subsequently, Lau and Tan (2003) report similar findings. They note two possibilities for the link between budget participation and budget emphasis: (a) desire of subordinates to influence the budget goals that are used to evaluate them, and (b) desire of the superior to be just or fair. Unfortunately, they do not provide empirical tests to assess separately the impact of these differing reasons. The current study does so and expands the theoretical explanations involving fairness.

Issues of fairness have been extensively examined in the organizational justice literature. Based upon their literature review, Folger and Cropanzano (1998) argue employees care deeply about how their organizations treat them, especially with regard to performance appraisal. Prior studies suggest that the perceived fairness of the performance evaluation system has links with important employee attitudes and actions such as turnover, organizational commitment and organizational citizenship behaviours (see review by Erdogan, 2002). As argued in Dulebohn and Ferris (1999), it has been demonstrated that individuals desire input (‘voice’) in their performance evaluations and the extent of such input influences their perceptions of organizational fairness. The association between employee input and fairness perceptions may extend to the setting of the performance standards used in employee evaluations. Lind et al. (1990) propose that individuals prefer to have input in setting their performance standards and consider standards developed with their input as fair. Participation in setting performance standards may affect fairness perceptions via both instrumental and non-instrumental concerns (Lind et al., 1990). Instrumental concerns relate to the opportunity to influence performance goals so that the subsequent performance evaluation is more likely to be favourable. Individuals who have such opportunities view the process of setting performance goals as fair. Non-instrumental concerns relate to feelings of status and respect within the social group. Within an organization, participation in setting performance goals is a signal that management respects the individual and leads to favourable perceptions of organizational fairness by the individual.

Based upon these organizational justice studies, we propose that when budget goals are used to evaluate subordinates, subordinates seek to participate in setting the budget and subordinates consider such participation as fair and just. Further, managers will encourage subordinate participation to satisfy the fairness concerns of the subordinate. According to Greenberg (1990), managers have a number of reasons to be fair in their interactions with subordinates. First, some managers believe that being fair is the ‘right’ thing to do, that is, fairness is part of their moral code. Second, as fairness is considered a highly favourable personality characteristic, managers strive to present themselves as fair: (a) to themselves to enhance self-image, and (b) to others to enhance social image. While treating employees fairly may enhance the manager's self and social esteem and thus yields psychological rewards, there are also pragmatic benefits for the manager. As argued in Greenberg et al. (1991), the fair treatment of subordinates leads to subordinate trust in the manager, which in turn leads to a more effective manager. The actions and plans of a manager with a reputation for fairness are more readily accepted by subordinates. They also observe that a fairness reputation is especially important in fostering acceptance of major changes in the workplace. According to Greenberg (1988), managers are aware of the practical benefits of a fairness reputation and actively cultivate such reputations. Based upon a survey of business managers, Greenberg notes that managers commonly use subordinate participation in decision making to enhance subordinate perceptions of the manager's fairness.

In summary, managers may be sensitive to the fairness concerns of subordinates. Subordinates are particularly interested in the fairness of performance evaluation and seek input or voice in the evaluation process to ensure its fairness. When budget goals are used to evaluate employee performance, superiors may encourage subordinate participation in setting the goals to address the fairness concerns of the subordinate; thus:

H4:
The evaluative use of budget has a positive relation with the superior's encouragement of budget participation.

METHOD AND DATA ANALYSIS

A survey questionnaire was used to collect data. To secure companies for the survey distribution, the dean of the business school of one of the co-authors was asked to identify companies with strong relations with the school that might be willing to participate in the study. Nineteen firms were subsequently contacted. Executives at thirteen companies agreed to participate. These firms included twelve manufacturing companies and one trucking enterprise. Each company had at least 100 employees with a median of 1,174 employees. At each firm, top executives were asked to distribute the survey to managers and supervisors with budget responsibilities. Questionnaires were provided to 114 individuals. Seventy employees fully completed the survey yielding a response rate of 61 per cent (70/114). Respondents worked in a variety of areas including: accounting, finance, human resources, marketing, operations and production.² Most respondents (76 per cent) described themselves as middle or upper level managers. The mean age of the respondents was forty-three years while the mean length of employment with their company was eleven years.

The anonymity of responses was stressed in the introductory letter to participants. Respondents were instructed to mail the completed questionnaire directly to the researchers using the postage-paid envelopes provided to them. Also, to control for potential order response bias, as recommended by Alreck and Settle (1995, Chapter 4), two versions of the survey were administered that differed only by the order of the questions. One-way analysis of variance was performed on each variable which revealed no significant differences between versions for any variable. This suggests that order response bias is not a problem.

Measures

The variables measured in the questionnaire include proxies for: leadership style, information asymmetry, use of budget for performance evaluation, superior's encouragement of budget participation, and budget participation. Questions used to measure the variables appear in the Appendix.

The leadership style of supervisors was measured using the Leader Behavior Description Questionnaire (LBDQ, Form XII) developed by Stogdill (1963). The LBDQ has ten items that measure the consideration of the superior toward subordinates. The authors of the current study selected five items from the scale which they believe best represent the theoretical construct. The LBDQ represents one of the most widely used measures of leadership style in the organizational behaviour literature (see reviews by House and Baetz, 1979, and House, 1996). Schriesheim and Bird (1979) argue that this scale represents the most valid measure of leadership style. It has been used repeatedly in the accounting literature (Pratt and Jiambalvo, 1981, 1982; Jiambalvo and Pratt, 1982; Brownell, 1983; Kida, 1984; Kelley and Margheim, 1990; Otley and Pierce, 1995). In the current study, the Cronbach alpha is a credible .87. In factor analysis, all five questions loaded on a single component. The component has an eigenvalue of 3.3 and explains 66 per cent of total variation.

Information asymmetry was measured using a six-item scale developed by Dunk (1993). The scale attempts to determine the extent to which a superior has more information than the subordinate regarding the subordinate's area of responsibility. Prior studies (Dunk, 1993; Chia, 1995) report satisfactory internal reliability and construct validity for the measure. In the current study, the Cronbach alpha is .81. Factor analysis indicates that all questions load on a single component with an eigenvalue of 3.2 that explains 52 per cent of total variation.

The use of budget goals for performance evaluation was measured using a five-item scale developed by Abernethy and Stoelwinder (1991) based upon prior research by Swieringa and Moncur (1975). The Cronbach alpha is .81 in the current study. Factor analysis reveals that the five questions load on one component which has an eigenvalue of 2.9 and explains 57 per cent of total variation.

Encouragement of subordinate budget participation was measured using a three-item scale developed for this study. The instrument attempts to determine the extent to which the superior seeks the input of the subordinate during budgeting. The Cronbach alpha is .78. Factor analysis indicates that all questions load on one component which has an eigenvalue of 2.1. The component explains 70 per cent of total variation.

The six-item scale of Miliani (1975) was utilized to measure budget participation. It attempts to assess the involvement and influence that an individual has in the budgeting process. Prior accounting researchers report satisfactory reliability and validity for the scale (e.g., Brownell, 1982; Brownell and Hirst, 1986; Mia, 1988; Brownell and Dunk, 1991; Dunk, 1993; Lau and Buckland, 2001; Lau and Lim, 2002). For our study, the Cronbach alpha is .85. Factor analysis reveals that the six items load on one component which has an eigenvalue of 3.5 and explains 58 per cent of total variation. To assess if the measure for budget participation overlaps with the measure for the encouragement of subordinate budget participation, factor analysis was performed on the two scales. The items for the scales loaded appropriately on two separate factors (using an oblique rotation and a cutoff of .40 for the standardized regression coefficients).

The survey also has measures to assess several potential response biases, including social desirability response (SDR), positive affectivity and negative affectivity. SDR bias occurs if respondents answer questions so that their response appears socially acceptable (Smith, 1967; Ganster et al., 1983; Arnold et al., 1985). Such responses may produce spurious relations between variables (Ganster et al., 1983). In the current study, individual propensity for SDR was assessed using a scale adopted from Crowne and Marlowe (1964) that appears in the Appendix. Scores on this scale were used to adjust variable measures using the techniques recommended by Anderson et al. (1984). The adjusted measures yield the same findings as the original measures, which suggests that SDR is not a problem in the current study. Results for the original measures are also reported.

We also attempt to assess potential response biases that involve personality characteristics of positive and negative affectivity. Positive affectivity is the individual's disposition to perceive situations in positive ways while negativity affectivity is the tendency to view situations negatively (Agho et al., 1992; Iverson and Erwin, 1997). Three-item scales, adopted from Agho et al. (1992), were used to measure positive and negative affectivity (see Appendix). Affectivity scores were used to adjust variable measures using the method of Anderson et al. (1984). Statistical results for the adjusted measures mirror those for the original measures, which suggests that affectivity is not a problem. Results for the original measures are also reported.

Data Analysis Employed

Descriptive statistics for the measures appear in Table 1 while correlations appear in Table 2. Path analysis was used to test the hypotheses. As Figure 1 summarizes, the exogenous variables (leadership style, information asymmetry and evaluative use of budget) are posited to affect budget participation through a mediating variable, encouragement of budget participation. Hartmann and Moers (1999, p. 310) note in their review of budgeting studies that path analysis is an appropriate method in mediation models.³

Table 1.
DESCRIPTIVE STATISTICS

Variable	Mean	SD	Observed range	Theoretical range
Leadership style	24.2	7.29	7–35	5–35^a
Information asymmetry	31.0	6.24	14–42	6–42
Evaluative use of budget	26.6	5.43	9–35	5–35
Encouragement of budget participation	16.4	3.81	5–21	3–21
Budget participation	30.5	6.33	7–40	6–42

^a Calculation of theoretical range. For leadership style, there are five items, each with a seven-point response scale ranging from 1 (strongly disagree) to 7 (strongly agree). Theoretically, the lowest possible score is 5 (5 times 1) whereas the highest possible score is 35 (5 times 7). Calculation of theoretical range for other variables is similar.

Table 2.
MATRIX OF INTERCORRELATIONS

	Leadership style (1)	Evaluative use of budget (2)	Information asymmetry (3)	Budget participation (4)	Encouragement of budget participation (5)
(1)	1.000
(2)	.198	1.000
(2)	(.100)
(3)	−.273	.063	1.000
(3)	(.022)	(.604)
(4)	.432	.647	.020	1.000
(4)	(.001)	(.001)	(.867)
(5)	.526	.509	.018	.642	1.000
(5)	(.001)	(.001)	(.883)	(.001)

p-values are reported within parentheses (H₀: Rho = 0).

The path model corresponds to the theoretical model in Figure 1. Each hypothesized link between variables has a path coefficient that measures the impact of the antecedent variable in explaining variance in an outcome variable. The path coefficient measures the association between variables in terms of standard deviation, specifically the change in the outcome variable, measured in standard deviations, associated with a one standard deviation change in the antecedent variable. Values for path coefficients were estimated using regression analysis (Pedhazur, 1982; Asher, 1983). The path coefficient value is the standardized beta coefficient determined by regressing the outcome variable on the appropriate antecedent variables.

RESULTS

Regression equations and resulting path coefficients for the hypotheses appear in Table 3. Path coefficients for the proposed theoretical model are illustrated in Figure 2.

Table 3.
PATH ANALYSIS RESULTS

Equation	Dependent variable	Independent variables	Associated hypothesis	Path coefficient	t-value	p-value	R ²
(1)	EBP	LS	H1	.479	4.96	.001	.46
		IA	H3	.123	1.30	.199
		EUB	H4	.406	4.37	.001
(2)	BP	EBP	H2	.315	2.86	.006	.57
		LS	—	.188	1.86	.068
		IA	—	.038	0.44	.661
		EUB	—	.447	4.73	.001

For both regression equations, the F-value has a p-value less than .001.
EBP = encouragement of (subordinate) budget participation
LS = leadership style
IA = information asymmetry
EUB = evaluative use of budget
BP = budget participation

A key variable in the theoretical model is the superior's encouragement of budget participation by the subordinate (EBP). The results of regression analysis with EBP as the dependent variable appear in Table 3 (Equation (1)). As predicted in H1, considerate leadership style (LS) is a statistically significant predictor variable (p= .001). Also, as predicted in H4, evaluative use of budget (EUB) is significant (p= .001). As Table 3 reveals, the proposed relation (H3) between information asymmetry and EBP is not supported. Further, as indicated in Table 2, information asymmetry does not have a statistically significant correlation with EBP or budget participation. This contrasts with Shields and Young's (1993) significant correlation between information asymmetry and budget participation.

Important differences between the two studies may account for the divergent statistical results involving information asymmetry. These include the nature of the sample and the measurement of information asymmetry. Shields and Young (1993) surveyed very large companies (S&P 500) that tend to be geographically dispersed and have many product lines. ‘The information asymmetry examined was between central management (top management at headquarters) and the investment and profit center managers immediately below central management’ (p. 272). To measure information asymmetry, corporate controllers were asked: ‘How much more does each manager know relative to the central management about the following items?’ (p. 272). This question measures the controller's perception of the average information asymmetry that exists within the controller's company, between upper level managers and top executives at headquarters; consequently, information asymmetry is measured at the company level.

The current sample are managers and supervisors in smaller and more localized firms. The measure of information asymmetry used here, originally developed by Dunk (1993), focuses on information differences in the context of superior/subordinate relations. Consider this question: ‘In comparison with your supervisor, who is in possession of better information regarding activities in your area of responsibility?’ Information asymmetry is thus measured at the individual, not the company, level. Further, this approach examines information asymmetries between a wide variety of organizational levels whereas Shields and Young (1993) focus on information differences between upper level managers and top executives at headquarters.

Equation (2) in Table 3 reveals the results of regression analysis when budget participation is the dependent variable. As predicted in H2, EBP is a statistically significant predictor variable (p= .006). The evaluative use of budget (EUB) is also significant (p= .001). The finding of a direct link between EUB and budget participation mirrors the results reported by Lau and Buckland (2001) and Lau and Tan (2003). Our study extends their findings by demonstrating that the relation between EUB and budget participation has both (a) a significant direct effect (Table 3), and (b) a significant indirect effect. The indirect effect, which was not examined previously, involves links between EUB, EBP, and budget participation (EUB → EBP → BP). Using the techniques of Sobel (1982), the indirect effect was found to be statistically significant (p= .01).⁴Regarding the interpretation of the statistical results involving EUB, the direct link between EUB and budget participation may reflect the efforts of subordinates to participate in setting performance standards to ensure that the standards are fair and reasonable. The indirect effect (EUB → EBP → BP) may reflect the efforts of superiors to address the fairness concerns of their subordinates.

CONCLUSION

Budget participation has been examined often in the accounting literature. As Shields and Shields (1998) note, most studies have investigated the consequences of budget participation while ignoring its causes or antecedents; yet, as they argue, to understand fully the consequences of participation, researchers must understand why participation exists. The antecedent issue investigated here focuses on why superiors encourage subordinates to participate in the budgeting process. In attempting to explain the actions of the superior in this budgeting context, we rely upon a number of theoretical perspectives including leadership theory, agency theory and organizational justice. As Covaleski et al. (2003) argue, borrowing from multiple perspectives offers researchers the opportunity for more complete and valid explanations of budgeting practices.

In general, empirical results support the theoretical framework proposed above. This may aid in developing more complete models of the role of budget participation in the workplace. Regarding leadership, results suggest that leaders with a considerate leadership style are likely to promote subordinate participation in a budgeting setting. Extending this finding, budget participation may mediate the relation between leadership style and workplace outcomes like job satisfaction. Results also suggest that superiors promote subordinate participation when subordinates are evaluated using budget goals. As we argue, this may reflect the superior's concerns about the fairness or justice of the performance evaluation. Extending this finding, budget participation may mediate the relation between evaluative use of budget and work outcomes that prior research has linked to organizational justice such as job satisfaction and turnover.

While the current study focuses on why superiors encourage subordinate participation, subordinate desires also may play a role in budget participation. The findings indicate a significant relation between evaluative use of budget and budget participation. One can speculate that this may reflect the desire of the subordinate to participate in the budgeting process when budget goals are used to evaluate the subordinate. Future research could investigate this possibility more directly by measuring subordinate desire to participate. Other factors that may influence subordinate desire also could be examined (e.g., use of budget-based bonuses, satisfaction of higher order needs such as the need for influence).

Findings reported here are subject to the usual limitations of survey research. For example, they may be specific to the sample used. Measures of constructs may have errors; there may be important variables that were not included in the model, that is, omitted variable problems. The cross-sectional survey employed cannot prove causality. Although the response rate of 61 per cent is reasonably good for a survey of this type, non-response bias may be a potential problem. Finally, as in most surveys, common method bias may be an issue although the current study does attempt to control for three potential sources of bias: social desirability response, positive affectivity, and negative affectivity.

Footnotes

1 Although not directly relevant here, other early studies that examine leadership style in budgeting contexts include DeCoster and Fertakis (1968), Hopwood (1974) and Ansari (1976).

2 Respondents self-reported their functional areas. A breakdown of respondents by area follows: accounting (16), marketing (15), production (7), operations (5), finance (5), human resources (4), customer service (2), research and development (2), and insurance (2). The following areas had only one respondent: purchasing, billing, claims, executive, distribution, and general manager. In addition, six respondents gave no response to the question about functional area.

3 Hartmann and Moers (1999) critically review methodological issues, especially statistical issues, in prior budgeting studies. They report that the following types of errors are common: use of statistics which do not conform to the theory being tested; mis-specification of regression equations; incorrect conclusions concerning effect size; testing for strength of relation when hypothesizing the form; and misinterpretation of results concerning main effects and higher order interactions. Briers and Hirst (1990) also critically evaluate prior budgeting studies, specifically those that examine the use of budget information in performance evaluation. They discuss methodological problems such as: variable measurement; omitted variables; and ‘the use of test procedures that are only indirectly related to theory statements’ (p. 392).

4 Using the procedures recommended by Sobel (1982), the unstandardized path coefficient for the indirect effect, EUB → EBP → BP, was calculated using regression equations (1) and (2) in Table 3. Specifically, the unstandardized regression coefficient for EUB in equation (1) was multiplied by the unstandardized regression coefficient for EBP in equation (2). The resulting path coefficient was divided by its standard error to yield a t-value. The standard error was estimated using the following equation:
inline image

b₁ unstandardized regression coefficient for EUB in equation (1)
s₁ standard error of regression coefficient for EUB
b₂ unstandardized regression coefficient for EBP in equation (2)
s₂ standard error of regression coefficient for EBP

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APPENDIX
SURVEY QUESTIONS

Leadership Style (consideration)

1
My immediate supervisor is friendly and approachable.
2
My immediate supervisor treats his/her subordinates as his/her equals.
3
My immediate supervisor looks out for the personal welfare of subordinates.
4
My immediate supervisor explains his/her actions to subordinates.
5
My immediate supervisor acts without consulting his/her subordinates. (reverse wording)

Information Asymmetry

1
In comparison with your supervisor, who is in possession of better information regarding the activities in your area of responsibility?
2
In comparison with your supervisor, who is more familiar with the input-output relationships inherent in the internal operations of your area of responsibility?
3
In comparison with your supervisor, who is more certain of performance potential of your area of responsibility?
4
In comparison with your supervisor, who is more familiar technically with the work of your area?
5
In comparison with your supervisor, who is better able to assess the potential impact on your activities of factors external to your area?
6
In comparison with your supervisor, who has a better understanding of what can be achieved in your area?

Evaluative Use of Budget

1
The importance of meeting the budget to your supervisor.
2
The extent to which you investigate items which are ‘overspent’ against budget.
3
The extent to which your department's performance is evaluated against budget.
4
Budget variances are the extent to which actual performance levels deviate from performance levels which were forecast in the budget. To which extent are you held accountable for budget variances?
5
To what extent are you required to submit explanations concerning budget variances?

Encouragement of (Subordinate) Budget Participation

1
My immediate supervisor strongly encourages me to participate in the budget setting process.
2
My immediate supervisor actively seeks my input in the budget setting process.
3
In the budgeting process, my supervisor seems to seek my input more than the input of his/her other subordinates.

Budget Participation

1
The portion of the budget I am involved in setting.
2
The amount of reasoning provided to me by a superior when the budget is revised.
3
The frequency of budget-related discussions with superiors initiated by me.
4
The amount of influence I feel I have on the final budget.
5
The importance of my contribution to the budget.
6
The frequency of budget-related discussion initiated by my superior when budgets are being set.

Social Desirability Responding (SDR)

1
I have never intensely disliked anyone.
2
I have never deliberately said something that hurt someone's feelings.
3
I have never been irritated when people expressed ideas very different from my own.
4
No matter who I am talking to, I am always a good listener.
5
When I do not know something, I will readily admit it.

Positive Affectivity

1
I usually find ways to liven up my day.
2
I often feel happy and satisfied for no particular reason.
3
It is easy for me to become enthusiastic about things I am doing.

Negative Affectivity

1
Minor setbacks sometimes irritate me too much.
2
I often find myself worrying about something.
3
Often I get irritated at little annoyances.

Citing Literature

Volume44, Issue4

December 2008

Pages 423-442

Antecedents of Budget Participation: Leadership Style, Information Asymmetry, and Evaluative Use of Budget

Abstract