How Top‐down and Bottom‐up Budgeting Affect Budget Slack and Performance through Social and Economic Exchange

Abstract

This paper investigates the effects of a top-down (TD) versus bottom-up (BU) orientation in different stages of the budgetary target-setting process on slack and managerial performance. We use social exchange theory to explain the outcomes of these alternative budgetary arrangements, and complement the traditional focus on budgetary participation in target setting with a process-oriented perspective. We develop hypotheses predicting that TD and BU orientations in the subsequent stages of the budgeting process have different effects on managers' exchange relationships with the firm, and their behavioural responses. Using survey evidence from German managers across 127 firms we find that a TD orientation in the issuance of guidelines enhances economic exchange and that a BU orientation in the development of the initial budget proposal enhances social exchange, which in turn are associated with reduced slack and higher performance, respectively.

The impact of participation in strategic planning on managers’ creation of budgetary slack: The mediating role of autonomous motivation and affective organisational commitment

“…Second, we believe that this study contributes to the growing amount of research recognising that the budgeting process cannot be studied in isolation, as budgeting and strategic planning are both part of the organisational planning process (e.g. Covaleski et al, 2003;Kramer and Hartmann, 2011). Based on our study, it appears that BP is not directly related with managers' creation of budgetary slack, but that it only indirectly decreases budgetary slack through the mediating effect of autonomous budget motivation.…”

“…The possibility of creating budgetary slack can instil a conflict of interest, as slack creation may be beneficial for the manager but may run against the interests of the organisation as a whole (Kramer and Hartmann, 2011). Managers with strong affective commitment will act in the interests of the organisation just as they would in their own because they have come to perceive the interests as identical (Kim and Mauborgne, 1998).…”

Who Influences the Design of Management Accounting Systems? An Exploratory Study

“…; Hall ; Du et al. ; Kramer and Hartmann ). PLS is a component‐based structural equation modelling technique that is predominantly used in small‐sample studies (Ringle et al.…”

Budgeting, Psychological Contracts, and Budgetary Slack

“…Importantly, however, there are variations in the extent to which employees' involvement in budgeting influences their approved budgets. 4 Three commonly implemented types of EPB that vary in employees' influence on their approved budgets include affirmative budgeting (i.e., bottom-up budgeting) under which employees have full influence on their approved budgets, authoritative budgeting (i.e., top-down budgeting) under which employees have minimal influence on their approved budgets, and consultative budgeting under which employees have moderate influence on their approved budgets (Heinle, Ross, and Saouma 2014, Kramer and Hartmann 2014, Libby 1999.…”