Asymmetry of Pre-Decision Information and Managerial Accounting

Penno, Mark

doi:10.2307/2490707

Cited by 147 publications

(81 citation statements)

References 4 publications

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“…Field research by Merchant (1989) suggests that superiors may allow slack in subordinates' budgets to encourage coordination, motivation, and innovation. This contrasts with the agency theory perspective that budgetary slack is an inefficiency reflecting the effect of moving from an environment with perfect information to one with information asymmetry (e.g., Magee 1980;Christensen 1982;Baiman and Evans 1983;Penno 1984).…”

Section: Introductionmentioning

confidence: 82%

The Effects of Reputation and Ethics on Budgetary Slack

Stevens

2002

Journal of Management Accounting Research

189

104

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This experimental study tests the effects on budgetary slack of two potential controls for opportunistic self-interest-reputation and ethics. I manipulate the level of information asymmetry between the subordinate and the superior regarding productive capability and measure the subordinate's reputation and ethical concerns regarding budgetary slack. In this setting, I examine how information asymmetry affects reputation and ethical concerns, and test the effects of these concerns on budgetary slack. Consistent with prior findings, subordinates restrict the slack in their budgets to well below the maximum under a slackinducing pay scheme, even after five periods of experience. Budgetary slack is negatively associated with a measure of ethical responsibility from a pre-experiment personality questionnaire as well as reputation and ethical concerns expressed in an exit questionnaire. Subordinates express lower reputation concerns as information asymmetry regarding productive capability increases, thereby reducing the superior's ability to monitor the slack in their budget. Ethical concerns, however, are not diminished with increases in information asymmetry. These results suggest that reputation is a socially mediated control, whereas ethics is an internally mediated control for opportunistic self-interest.

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Section: Introductionmentioning

confidence: 82%

The Effects of Reputation and Ethics on Budgetary Slack

Stevens

2002

Journal of Management Accounting Research

189

104

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“…Several agency-theoretical studies show that pre-decision information may discourage agents if they are risk-averse (Bushman et al, 2000;Datar, 2000;Christensen, 1981;Baiman and Sivaramakrishnan, 1991;Penno, 1984, 1990and Baiman and Evans, 1983. Our model differs from these studies in two respects.…”

Section: Motivationmentioning

confidence: 74%

Information management with specific investments and cost-based transfer prices

Hinss

Kunz

Pfeiffer

2005

European Accounting Review

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We analyse information flows in a profit-centre organisation with internal trade between two risk-neutral divisions. Prior to production, the divisions make unverifiable investments in intrafirm synergies. After investments are made, the selling division announces a cost-based transfer price which includes a mark-up on variable costs. The buying division then decides what quantity to purchase at that unit cost. From the head office's perspective, the key issues are to influence both, divisional investments and the seller's manipulation of the mark-up. To do so, the head office can fund a pre-decision information system bef ore divisional investments are made. The system produces forward-looking information that can be used to improve the divisions' investments decisions, but which cannot be used in evaluating their performance. Our analytical framework allows us to identify cost and revenue structures for which pre-decision information either supports or destroys intrafirm synergies by motivating or discouraging divisional investments, thereby resulting in an increase in, decrease in, or in no impact whatsoever on, firm profit. Among our most interesting findings is the counterintuitive result that pre-decision information can undermine the incentives of risk-neutral agents to invest specifically. Our results add to earlier agency models that found different, albeit equally dysfunctional effects of pre-decision information. Contrary to these studies, our findings are not driven by either risk aversion or rent extraction.

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“…Based on this evidence and insights from principal-agent models (Demski and Feltham 1978;Baiman and Evans 1983;Penno 1984), we design a participative budgeting experiment to study public and private forms of opportunism within the organization. Our results suggest that public and private forms of opportunism may differ systematically and interact in ways that improve organizational performance.…”

Section: Discussionmentioning

confidence: 99%

“…Principal-agent models in Baiman and Evans (1983) and Penno (1984) demonstrate how participative budgeting can emerge as a dominant solution in this setting. These models incorporate a private signal observed by the agent regarding the relation between effort and production, and show that participative budgeting can create a Pareto improvement by allowing the agent to communicate his private information to the principal.…”

Section: Journal Of Management Accountingmentioning

confidence: 99%

“…Consistent with studies showing that budgetary slack can be relatively transparent (e.g., Onsi 1973;Merchant 1989), we operationalize budgetary slack as a public form of opportunism. Consistent with agency models (e.g., Demski and Feltham 1978;Baiman and Evans 1983;Penno 1984), we operationalize low effort as a private form of opportunism. In this setting, we manipulate whether the manager has the power to reject the producer's budget (Rejection Power) and whether the producer/manager pairs rotate each period (Pair Rotation).…”

Section: Introductionmentioning

confidence: 99%

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Public and Private Forms of Opportunism within the Organization: A Joint Examination of Budget and Effort Behavior

Schatzberg

Stevens

2008

Journal of Management Accounting Research

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ABSTRACT:We assert that some forms of opportunistic behavior within the organization are relatively transparent and, therefore, public in nature. Further, while organizations can tightly control such public opportunism, it may not be optimal for them to do so in the presence of private opportunism. To study how public and private forms of opportunism differ and interact, we jointly examine budget and effort behavior in a participative budgeting experiment. We group participants into producer / manager pairs and set the parameters such that the producer extracts the largest share of surplus from the manager by publicly setting the budget at zero and privately providing low effort. When the producer unilaterally sets the budget, the public opportunism of budgetary slack is higher and more affected by learning than the private opportunism of low effort. Giving the manager the power to reject the budget not only reduces budgetary slack by about 50 percent, but also generates reciprocity expectations and behavior. In particular, managers who allow more budgetary slack expect and receive higher effort from their producers on average. This reciprocity increases organizational performance by increasing the expected pay of the manager without decreasing the expected pay of the producer.

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Asymmetry of Pre-Decision Information and Managerial Accounting

Cited by 147 publications

References 4 publications

The Effects of Reputation and Ethics on Budgetary Slack

The Effects of Reputation and Ethics on Budgetary Slack

Information management with specific investments and cost-based transfer prices

Public and Private Forms of Opportunism within the Organization: A Joint Examination of Budget and Effort Behavior

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