Deceptive Superiors and Budgetary Reporting: An Experimental Investigation

Abstract

ABSTRACT Past research demonstrates that superiors possess private information about many features of the organization including cost systems. These studies provide evidence that superiors strategically disclose this information to influence the subordinates' actions, yet this issue has not been explored in a budgeting context. Accordingly, we study behavior in a budgeting setting with a cost system accuracy that is known to both the superior and subordinate or only known by the superior. When the accuracy is only observed by the superior, she might misrepresent it in an effort to elicit more truthful budget proposals from subordinates. Final budget authority affects how subordinates frame the budgeting setting; therefore, we compare cases where either the subordinate or the superior has final budget authority. Results indicate that superiors strategically misrepresent their private information in an attempt to reduce the creation of slack. Further, a cost system that sends an accuracy signal as private information to superiors reduces slack and increases superiors' earnings when subordinates unilaterally set their budgets, but not when superiors have final budget authority. Our results imply that superiors may strategically misrepresent information to mitigate slack consumption and that superiors may design information systems in such a way that they provide them with private information. JEL Classifications: C90; D82; M41; M55. Data Availability: Contact the authors.