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The Effect of a Leader’s Reputation on Budgetary Slack

Vincent K. Chong

Chanel Y. Loy

Advances in Management Accounting

ISBN: 978-1-78441-650-8, eISBN: 978-1-78441-649-2

Publication date: 17 July 2015

Abstract

Purpose

This paper examines the effectiveness of the reliance on a leader’s reputation as an informal control tool to mitigate subordinates’ budgetary slack. In addition, it seeks to explain whether this relationship is mediated by subordinates’ truthfulness in revealing their private information.

Methodology/approach

A laboratory experiment was conducted involving 60 undergraduate business students who participated in the experiment. A 1 × 2 between-subjects design was employed for the experimental study. Each subject assumed the role of a production manager responsible for setting a budget target. The experimental task employed involved a simple decoding task adapted from Chow (1983).

Findings

The results of this study indicate that budgetary slack is lower when a leader’s reputation is favourable than when it is unfavourable. In addition, it is found that subordinates’ truthfulness in revealing private information fully mediates the relationship between a leader’s reputation and budgetary slack.

Originality/value

This paper extends the limited literature on the reliance of informal controls in mitigating budgetary slack by examining a leader’s reputation as an informal control. The findings of this study provide important implications for the design of effective management control systems.

Keywords

Acknowledgements

Acknowledgments

We would like to thank Stijn Masschelein, Zahirul Hoque, Lokman Mia, John Sands, David Woodliff, participants at the 2011 AFAANZ conference, 2012 Global Accounting and Organizational Change Conference, as well as workshops participants at Griffith University and The University of Western Australia for providing helpful comments on an earlier draft of this paper. We also thank Michele Leong and Peter Robinson for their assistance in data collection. This project was funded by a research grant from the School of Economics and Commerce at the University of Western Australia.

Citation

Chong, V.K. and Loy, C.Y. (2015), "The Effect of a Leader’s Reputation on Budgetary Slack", Advances in Management Accounting (Advances in Management Accounting, Vol. 25), Emerald Group Publishing Limited, Leeds, pp. 49-102. https://doi.org/10.1108/S1474-787120150000025003

Publisher

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Emerald Group Publishing Limited