JMAR

Volume Five
FaU ]993

15
Antecedents and Consequences of
Participative Budgeting: Evidence on
the Effects of Asymmetrical
Information
Michael D. Shields
San Diego State University
and
S. Mark Young
University of Southern California
Abstract: A review of empirical studies on participative budgeting indicates that
most have focused on its consequences (e.g., attitude, motivation, performance,
satisfaction) rather than its antecedents. We suggest that the mixed results of
participative budgeting research are due to incomplete models of the process.
Further, we propose that researchers develop theories that tie particular ante-
cedents of participative budgeting to specific consequences. Next, we develop
a model that uses information asymmetry between local and central management
as the antecedent condition and link it to: (1) participation of local managers in
setting their budgets, (2) budget-based incentives and (3) firm-wide performance.
Data to test these relationships were gathered from corporate controllers of the
Standard and Poor's 500, and the relationships were tested using path analy-
sis. Three of the four hypotheses were supported—^the effects of information
asymmetry on participative budgeting, participative budgeting on budget-based
incentives and the effect of budget-based incentives on firm-wide performance.
The fourth hypothesis—the effects of information asymmetry on budget-based
incentives was only marginally supported. We also propose three other pos-
sible antecedents of participative budgeting that can be investigated: (1) a de-
sire to positively influence individual attitudes, behavior and performance, (2) to
reinforce a particular culture, and (3) to provide a mechanism for organizational
learning.

A decade ago, Brownell [1982a] developed a framework for organizing

research on parUcipatlve budgeting that divided the literature into two parts.
The first specified antecedent conditions which created a demand for par-
ticipation such as the environment (e.g.. uncertainty), organizational vari-
ables (e.g.. structure, technology), and national culture, while the second
focused on participation's consequences such as Increased motivation,
commitment, satisfaction and performance. In his review, he concluded
that the [p. 146-7],

This paper has beneJUedfrom comments received from Bob Capettinl Robert Chenhall.
Chee Chow. Ken Merchant. Sarah Bonner. two anonymous reviewers and partici-
pants at the accounting workshop at Utah, the 1991 Management Accounting Re-
search Conference in Atlanta, and the Second European Management Control Sym-
posium, Paris, 1992. We would like to thank MUn Guofor his research assistance
and Mark Young gratefully acknowledges the financial assistance of the KPMG Peat
Manuick Faculty Fellowship Program.
266 Journal of Management Accounting Research, Fall 1993

Research effort to date has tended to focus attention on the more gen-
eral question of luhether participation is effective or not. rather than speci-
fying the conditions under which It is effective. Conflicting results perme-
ate the literature ...
The main focus of participative budgeting research since Brownell's
[1982a] review, however, has still been on Its consequences, rather than
Its antecedents (see Blrnberg et al. [19901 for a review). The literature re-
lating to whether consequences such as performance are affected posi-
tively by participation Is still conflicting and Indicates that addressing the
reasons for participation may lead to a better understanding of the extant
research.
This paper has two purposes. First, ln the next section, we review the
literature and propose that theories of participation Include both its ante-
cedent conditions and consequences. Second, we develop a model of par-
ticipative budgeting that uses the information asymmetry between a supe-
rior and a subordinate as an antecedent and firm-wide performance as a
consequence variable. Also it is hypothesized that the relationship between
these variables is moderated by participative budgeting and budget-based
incentives. Following this discussion, the research method and results of
the hypothesis testing are presented. The hypothesis tests are based on
data gathered from corporate controllers of Standard and Poors (S&P) 500
firms. Finally, directions for future research are discussed, with particular
emphasis on identifying three other antecedent conditions of participative
budgeting.

LITERATURE REVIEW
In order to structure the review of the accounting literature, a classifi-
cation analysis was performed on the 28 empirical studies of participative
budgeting that used either laboratory experimentation or surveys published
in The Accounting Review. Journal of Accounting Research and Accounting.
Organizations and Society from 1970 through 1991. Of the 28 studies, 24
examined only the consequences of participation.' Bruns and Waterhouse
[19751 and Seiler and Bartlett 11982] examined (cross-sectional) determi-
nants of participative budgeting and only Merchant [1981, 1984] exam-
ined both determinants and consequences. A consistent belief rooted in
early participative budgeting studies [Argyris, 1952; Becker and Green.
1962] was that participation was used to improve outcomes such as em-
ployee morale, motivation, commitment and satisfaction. The inclination
to study consequences Is highly consistent with research on participative
decision making in contexts other than budgeting [Locke and Schweiger.
1979).

'The 24 studies are Brownell 11981, 1982b.c, 1983a,b. 1985). Brownell and Dunk (19911,
Brownell and Hirst [19861, Brownell and Mclnnes I1986I. Chenhall [1986|, Chenhall and
Brownell I1988|, Cherrlngton and Cherrlngton [1973], Collins |1978|, Dunk 11989|, Foran
and DeCoster (19741, Frucot and Shearon (1991], Kenis 11979). Merchant (1985|. Mia (1988.
19891. Milan! (19751. Onsl (1973|, Searfoss [1976( and Tiller (1983(. Field studies were
excluded because a review by Fenrelra and Merchant (in press] Indicated that no Oeld studies
on participative budgeting were published between 1984 and 1992.
shields and Young 267

Since survey research methods are used in this paper, a classification

analysis of the 23 surveys (five of the 28 cited above were laboratory ex-
periments) which examined cross-sectional correlations between partici-
pative budgeting and its consequences was performed. One survey was
excluded because the level of disclosure did not permit a classification analy-
sis. Two important findings emerged. First, of the 22 remaining studies,
many different theoretical frameworks were used to motivate the analyses
of the outcomes of participative budgeting (e.g.. contingency, balance, role,
leadership style, achievement motivation, locus of control, goal setting,
cognitive dissonance, level of aspiration, expectancy, personality and evalu-
ation style). Diversity as to theories exists both across studies which used
the same variables and within a study. Our conjecture is that this diversity
stems, in part, from the lack of understanding regarding why participative
budgeting is used in organizations.
Second, a count of the number of times that a particular consequence
variable was significant (with an alpha probability of less than 0.05) was
performed. Overall, seven consequence variables were tested (satisfaction.
performance, budget attitude, motivation, job tension, slack and job in-
volvement), and there were 24 tests of hypotheses in which the inferential
statistic was significant in < 0.05). However, there were 35 hypothesis tests
in which the inferential statistic was not significant and/or the sign was
not as predicted.^
These two findings are consistent with Brownell's (1982a. p. 124) ear-
lier assessment that "...the literature remains fraught with contradiction,
overlap and a general lack of conclusiveness...." This diversity of frame-
works can be viewed as both a strength and a weakness. The strength is
that researchers have examined the effects of participative budgeting us-
ing a variety of theories and variables. The weakness is that research has
not produced a coherent or unified explanation for the conditions under
which participation is beneficial to individuals and organizations. The di-
versity also limits the use of statistical meta-analysis (Hunter et al. 1982].
The aforementioned results relating to the budgeting context are simi-
lar to research In participative decision making in general. Several qualita-
tive and statistical meta-analyses of the participative decision making lit-
erature also lead to the conclusion that the effects of participation on con-
sequence variables are weak (see Locke and Latham [1990. pp. 169-170]).
Locke and Schweiger [19791 classified laboratory experiments, field experi-
ments and correlational field surveys as providing evidence of a positive,
negative or no-difference effect of participative decision making on perfor-
mance and satisfaction. The evidence was ambiguous regarding perfor-
mance as approximately an equal number of studies found a positive or a
negative effect, with the modal study finding no effect. However for satis-
faction, 60 percent of the studies found a positive effect, with 30 percent
finding no effect. In another classification study. Leana et al. (19901 found
ten studies in which there was a positive relationship between participa-

*rhese 59 tests break down as follows: satisfaction (5 significant, 3 not significant),

performance (12 signiflcant, 13 not significant), attitude (1 significant. 10 not significant),
motivation (3 significant, 7 not signiflcant). Job tension (1 significant, 1 not significant),
slack (1 significant, 1 not significant) and job Involvement (1 signiflcant. 0 not significant).
265 Journal of Management Accounting ResearcK Fall 1993

tive decision making and performance. 20 studies in which there was no

relationship, two studies in which there was a negative relationship, and
15 studies in which the relationship was Interactive. Another classification
of studies which examined the participative decision making-satisfaction
relationship also found a great deal of diversity in results with many stud-
ies finding a positive association and many others finding either a negative
or no association (Cotton et al.. 19881.
Wagner and Gooding (1987bl performed a statistical meta-analysis of
70 published studies on participation and its consequences (performance,
decision performance, motivation, satisfaction, and acceptance of conse-
quences given participation) to reconcile the conflicting meta-analyses of
Miller and Monge (19861 and Wagner and Gooding (1987al. Their main
findings [p. 524] were that the correlation between participation and its
various outcomes is 'Modest," and that "many of the noteworthy positive
findings" reported were due to methodological artifacts. Further, they found
that only a small correlation is due to a direct relationship between partici-
pation and consequence variables.

Determinants of Participative Budgeting

Four streams of research have discussed some antecedent conditions
for participation. The first stream is based on contingency theory (see
Birnberg et al. (19901). This research has found that contextual variables,
such as environmental uncertainty and technology, are correlational ante-
cedents of participative budgeting [Birnberg et al. 1990).
The second stream stems from the work of Locke and colleagues and is
focused on individual level participation and its motivational consequences
(e.g.. motivation, commitment, performance, satisfaction) [Locke and
Schweiger, 1979; Leana et al., 1990]. Locke proposes that the benefits of
participative decision making are work motivation and/or cognitive un-
derstanding. The cognitive perspective has not been pursued nearly as much
as the motivational perspective; however, this direction for research is gain-
ing momentum as Locke et al. [1981. p. 139] state that,
... the single most successful field experiment on participation to date
stressed the cognitive benefits: participation was used to get good Ideas
from workers as to how to Improve performance efficiency.
Recently, some participative decision making research has either tested
hypotheses based on the cognitive perspective or tested the relative strength
of motivational and cognitive explanations [Locke and Latham. 1990, pp.
170-1].
The third stream of research stems from the Japanese management
literature. Many Japanese firms employ concepts such as participative
decision making and quality circles with the goal of obtaining accurate
infomiation about local conditions in the various parts of a firm [Ouchi,
1979; Young. 19921. This information is used to improve firm-wide perfor-
mance directly through more efficient resource allocation. Whfie motiva-
tional consequences like improved morale and job satisfaction may occur,
they are not the primary reason for participation in Japanese firms.
Finally, ln contrast to many of the behavioral studies, agency theorists
have analytically modeled how differences in information between a supe-
rior and a subordinate, or information asymmetries, affect the demand for
Shields and Young 269

participative budgeting In organizations IMagee. 1980; Chrlstensen. 1982;

Balman and Evans. 1983;Penno. 1984, 1990; Kirby etal.. 19911. The agency
view is that participation Is used by a superior to learn about the local
environment so that decisions such as resource allocation can be improved
and optimal Incentive contracts designed for subordinates.^
Hypotheses
Agency theorists ai-gue that the demand for participative budgeting
arises because various parties engaged In the budgeting process possess
differential information about uncertainty (e.g.. central and local manage-
ment) [Magee. 1980; Baiman. 1982; Christensen, 1982; Baiman and EVans.
1983; Penno. 1984. 1990; Klrby et al.. 19911. Except for a few studies (e.g.
Pope [19841 and Young [19851) the behavioral literature has not exploited
this explanation for participative budgeting."* Instead, when there has been
an explicit focus on antecedents, the behavioral literature usually discusses
absolute levels of uncertainty (present or absent as in Young [1985]) but
not differences in levels of uncertainty. The agency perspective assumes
that a signiflcant reason for the existence of participation is the transfer of
Information from a subordinate to a superior and that there are potential
gains for both parties (e.g.. better information, resource allocation, incen-
tive plans, performance, compensation).
Information asymmetry generally would be most severe in flrms which
are extremely large, and geographically dispersed with diverse products
and technologies. In these firms, central management does not know rela-
tively more about local conditions than do local managers. Thus, central
management can use participative budgeting to leam about local environ-
ments as well as to provide motivation. This allows central management to
better allocate resources to operating units and to offer operating manag-
ers better incentive contracts. In general, as the difference in information
Increases, there is more potential gain from participation. This argument
is summarized in the first hypothesis.

^As an example of how an understanding of antecedents can affect particular consequences

of participation the following example is offered. Consider a situation in which a researcher
is trying to understand the effect that partieifjation is having on lower level managers. Many
studies have assumed that senior management uses participative budgeting to increase job
satisfaction. However, in some situations senior management might decide to use participation
to obtain a subordinate manager's private Information, rather than attempting to Increase
his or her job satisfaction. In this situation, participation might consist of a meeting in
which the superior aggressively attempts to obtain the manager's Information. A researcher
surveying the firm In an attempt to determine whether participation Increased job satisfaction
would probably find few positive results. Contrast this with a situation In which a superior
truly desires to inerease job satisfaction and performance by allowing subordinates the
opportunity for participation involving Joint decision-making |Locke and Schweiger, 19791.
Structuring research (especially survey studies) on participative budgeting by including
questions relating to why subordinate managers think participation is used and the
antecedent conditions that are currently in place could provide more consistency for the
results in the literature.
^However, behavioral research has empirically examined the association between Information
asymmetry and information misrepresentation. Young [19851 examined how the effect of
Information asymmetry on slack creation was moderated by felt social pressure not to
misrepresent performance capability. Jaworski and Young [19921 examined how the effect
of Information asymmetry on information misrepresentation was moderated by Job tension
and jjerson role conflict.
270 JoamaX of Management Accounting Research, Fall 1993

HI: There is a positive association between the extent of Information asym-

metry and the use of participative budgeting.
Central management uses local Information gained from participative
budgeting for at least two purposes. First, the Information is used to Im-
prove the ex ante efficiency of resource allocation among the operating
units and, hence, expected firm-wide performance. Second, this informa-
tion can be used to design more effective incentive systems that can be
used to increase motivation. It Is conjectured that when participative bud-
geting is used more extensively, management makes greater use of Incen-
tives that reward performance based on meeting or exceeding the budget.
Such Incentives are known as budget-based schemes (Demski and Feltham.
1978: Balman, 1982: Chow. 1983].
H2: There is a positive association between the use of participative bud-
geting and the use of budget-based Incentives.
Since subordinates can use local Information to their personal advan-
tage, some agency models use budget-based incentives to encourage sub-
ordinates to use their private Information to increase the level of goal con-
gruent behavior IDemski and Feltham. 19781. When an information asym-
metry exists between local and central management, in addition to using
participative budgeting, central management also uses budget-based in-
centives. Since senior management Is unaware of how a manager might
use his or her information, budget-based Incentives are employed to moti-
vate managers to use the information to improve performance.
H3: There is a positive association between the extent of Information asym-
metry and the use of budget-based incentives.
A critical question being asked in this research is, does the firm gain
from the use of participative budgeting? One positive outcome relates to
improvements in firm-wide performance. Hopwood 11976] argues that there
is not a direct link between participative budgeting and performance. His
position is consistent with the empirical results ln several of the studies on
participative budgeting (e.g.. Brownell (1982b]. Merchant [1984]). One vari-
able that may moderate the relationship between participation and perfor-
mance Is budget-based incentives. We believe that an important benefit
derived from participative budgeting and budget-based incentives is that
expected firm-wide performance improves as the superior allocates re-
sources to subordinates with the best reported opportunity sets and those
who are motivated to maximize goal congruent performance.
Two types of empirical research show a positive relationship between
budget-based incentives and performance. Laboratory research by Chow
[19831 and Waller and Chow 11985] report that performance increased as
the incentives offered were more budget-based, although controlling for per-
formance capability mediated the effect. Murphy's [1985] econometric analy-
sis of executive compensation for the period 1964-1981 using 72 lai:ge U.S.
manufacturing firms found a strong positive relationship between executive
compensation and organization performance (retum realized by the common
stockholders). The next hypothesis is consistent with these findings.
H4: There is a positive association between the use of budget-based in-
centives and firm-wide performance.
Shields and Young 271

Figure 1
Model

Participative
Budgeting
(X2)

Information ^ Budget-based Firm-wide

Asymmetry ^~ *" Incentives ^""^ ^ Performance
(XI) H3 tX3) ^j|4^ (X4)

The four hypotheses ln the model are shown in Figure 1. This model is
the basis for testing the hypotheses. The model expresses the four rela-
tionships in the four hypotheses as paths. (P^ J. among the four variables.
The model Indicates that in order to reduce the potential for realizing ad-
verse effects from information asymmetries, central management uses par-
ticipative budgeting (P, g) and budget-based Incentives (Pj 3). ParticipaUve
budgeting also has an effect on budget-based incentives (Pj 3). which in
turn affects flrm-wide performance (P34).
Research Method
THE SURVEY
The sample of firms consists of those belonging to the S&P 500. These
firms were surveyed as they represent the entire U.S. economy. Corporate
controllers were selected as Individuals to survey. Controllers were chosen
because they: (1) play a key role in designing the information and control
system of a firm and are thus likely to appreciate the overall picture of the
budgeting system (probably more so than the average manager). (2) have
direct and frequent access to top management to discuss Issues relating to
control system design and operation, and (3) provide a perspective on the
role of participative budgeting that has been missing from the literature.
Thirteen firms were deleted initially from the S&P 500 population be-
cause they were either companies which were new or headquartered out-
side of the U.S. Of the 487 remaining firms, a total of 98 usable responses
were received. The effective response rate of 20 percent is at the low end of
what is considered to be the expected response rate (20-40 percent) for
mail surveys [Kerllnger, 1986]. The expected response rate was low. in part,
because some of the information requested was proprietary (e.g., compen-
sation). Because the respondents were guaranteed anonymity, it also was
not possible to do an additional mailing in order to Increase the sample
size. While acknowledging the relatively low response rate, each sample
firm represents an important business.
Another way to evaluate the adequacy of this sample is to compare it to
the samples used in the other survey studies on participative budgeting
272 Journal of Management Accounting Research, Fall 1993

which examined antecedents and/or consequences. Inspection of these 23

studies published ln The Accounting Review, Journal ofAccounting Research
and Accounting. Organizations and Society during the 1970s and 1980s
indicates that the unit of analysis ln 22 studies was a manager (typically
first-line). These 23 studies are based on a total of 17 data sets that were
obtained from an average of 14 firms, with questionnaires being sent to an
average of 120 respondents with the average number of usable responses
being 74. In most studies, a convenience sample of firms, typically fairly
small ln size and located relatively close to the researchers home univer-
sity, were used. Given these data, we feel that our sample compares favor-
ably with samples used ln prior research.
Measurement of Variables
Information asymmetry, participative budgeting, budget-based Incen-
tives and firm-wide performance were each measured by subscales which
were subsequently aggregated to form an overall measure of each variable.
Information asymmetry was measured in relative terms (e.g.. subordinate
knows twice as much) as it is difflcult to assess In absolute terms.
Since no established measures of lntra-organizational vertical infor-
mation asymmetries exist for single respondents, one was developed. The
information asymmetry examined was between central management (top
management at headquarters) and the investment and profit center man-
agers Immediately below central management. As these information asym-
metries can occur In relation to Input, process and/or output, a question
was developed for each. Information asymmetries were directly measured
by asking. "How much more does each manager know relative to central
management about the following Items?" The five items were labor input,
materials input, capital input, market for outputs, and technology (trans-
formation of Inputs to outputs). The response scales were anchored by (1)
"Manager Knows the Same as Central Management" and (7) "Manager Knows
a Lot More than Central Management."
The extent of participative budgeting was measured using five ques-
tions adapted from prior research (Brownell. 1982b. 1985: Merchant. 1981;
MUanl, 19751. The first three were: (1) "How important is the manager's
contribution to the setting of the budgets?". (2) "How important Is it that
budgets Include changes that were suggested by the managers?", and (3)
"How important is it that a budget is not finalized until a manager is satis-
fied with it?" These questions were anchored: (1) "E:xtremely Unimportant"
and (7) "EMremely Important." The fourth question. "How infiuentlal do
you feel that the managers are ln setting the budgets?", was anchored by:
(1) "Not at All Influential" and (7) "Extremely Infiuential." The fifth question
was "How frequently does central management Initiate budget-related dis-
cussions with the managers?", anchored by: (1) "Extremely Infrequently"
and (7) "Extremely Frequently."
Budget-based Incentives were measured by responses to ilve questions.
Four of the questions had seven-point response scales: (1) "The compensa-
tion system for managers is very clearly specified In terms of how compen-
sation is related to budgeted performance." (2) "Managers' financial re-
wards Increase as actual performance increasingly exceeds budgeted per-
formance." (3) "How Infiuential is the actual performance relative to the
Shields and Young 273

budgeted performance of a center In affecting the probability that the man-

ager will be promoted?" and (4) "Consider the managers whose last year's
performance was In the top 25 percent of the managers' performance In
your firm. How likely is it that they received larger budget performance-
based bonuses than did the managers whose performance was below the
top 25 percent?" The first two questions were anchored by (i) "Strongly
Disagree" and (7) "Strongly Agree."The third question was anchored by (1)
"Not at All Influential" and (7) "Extremely Influential." and the fourth ques-
tion by (1) "Extremely Unlikely" and (7) "Extremely Likely." The fifth ques-
tion asked the percentage of managers who received a bonus based on
their centers' actual performance relative to budgeted performance.
Firm-wide performance was measured through answers to four ques-
tions. These were: (1) percentage change In net income. (2) percentage
change in common stock price. (3) percentage change In ROI and (4) a
subjective rating of the overall performance of the firm, anchored by (1)
"Worst Possible Performance" and (7) "Best Possible Performance."
Path Analysis
Path analysis was used for hypothesis testing. The effectiveness of the
method lies In Its ability to construct a set of statistical (correlational) rela-
tionships among a set of variables. In path analysis, the relationships be-
tween variables are specified by path coefficients (P^ y) that are Identical to
standardized partial regression coefBcients [Li. 1970; Duncan. 1966). The
results of the path analysis also provide information on the relative Impor-
tance of the independent variables in terms of their effect on the depen-
dent variable{s).

RESULTS
Descriptive Statistics
Descriptive statistics for the four variables are shown in Tables 1 and
Pearson correlations in Table 2. For budget-based Incentives and firm-
wide performance, the descriptive statistics for the scales are based on
standardized Z values because the underlying subscales had heterogeneous
scale properties. Thus, these variables' subscales were standardized and
the standardized values were summed across the subscales. The conver-
gent validity of the four variables was assessed using Cronbach's alpha.
All four alphas were greater than 0.60 (Table 1). the lowest value at which
a scale is considered reliable.
Tests of Hypotheses
In testing the four hypotheses, the expected sign of each correlation or
path coefficient is positive and the expected magnitude is significantly greater
than zero. In path analysis, the blvariate correlation between any pair of vari-
ables can be estimated from the paths leading from common antecedent vari-
ables. In our model, only one variable is estimated by more than one variable,
budget-based incentives. Xg. Each of the other three paths. P, 3. Pj 3. and
P3 4. has only one antecedent variable. The path coefficients are;
274 Journal of Management Accounting Research. Fall 1993

Table 1
Descriptive Statistics:
Scales and Subscales
SCALE Cronbach's
Subscale' _S_ Alpha
INFX^RMATION
ASYMMETRY 95 23.61 7.26 0.90
Labor 95 5.44 1.50
Material 95 5.36 1.56
Capital 95 3.76 1.77
Output 95 4.55 1.88
Technology 95 4.51 1.81

PARTICIPATTVE
BUDGETING 95 28.43 4.79 0.83
(1) Contribution* 95 6.06 1.18
(2) Changes 95 5.99 1.16
(3) Satisfied 95 5.66 1.45
(4) Influence 95 5.84 1.14
(5) Discussions 95 4.87 1.25

BUDGET-BASED
INCENTIVES Z 68 -0.09 4.69 0.93
(1) Specificity 68 4.57 1.92
(2) Rewards 68 5.07 1.66
(3) Influence 68 4.78 1.32
(4) Performance 68 4.93 2.07
(5) Bonus 68 56.31% 44.66%

FIRM WIDE
PEPy^RMANCE Z 77 -0.09 2.68 0.68
Net Income 77 13.4% 57.50%
Stock Price 77 24.6% 24.10%
ROl 77 6.1% 5.35%
Total Performance 77 4.7 1.38

'See Measurement of Variables subsection for descriptions of the questions and

response scciles.

Table 2
Pearson Correlations
Information Participative! Budget-Based
Asymmetry Budgeting Incentives
Pariidpative
Budgeting 0.24*
Budget Based
Incentives 0.18** 0.37*
Firm-Wide
Performance -0.09 -0.01 0 .32*

• p<0.01
••p<0.10
Shields and Young 275

HI: Pj 2 = Lia = 0-24. fi < .01:

H3: Pi3 = i i ^ = 0.18. ]i<.07;and
H4: P3.4 = 1:3,4 = 0-32. U < .005.
The value for Pg 3 was found by solving equation 1:^
H2: P2 3 = £2.3 - (P1.3 * P1.2I = 0-33 (fi < 003) (1)
Three of the four values of the path coeflicients (Pjj. P23 and P34) are
signiflcant (E < 0.01) while the fourth (Pj 3) is marginally significant (fi <
0.07). These results provide support for all four hypotheses.
Post-Hoc Analysis
In Figure 1. flrm-wide performance is shown as a dependent variable.
Two of the other three variables, information asymmetry and participative
budgeting, determine budget-based incentives which In tum are hypoth-
esized to detenmlne firm-wide performance. Inspection of the coefficient of
determination for path (Pg^) Indicates that only 11 percent (= 0.33^) of the
variation in firm-wide performance Is explained by budget-based Incen-
tives, leaving 89 percent of the variance unexplained. While participation
helps determine the extent of budget-based incentives, its indirect effect
on firm-wide performance can be calculated from equation 2.
P2.4 = P2.3 * P3.4 = (0 33 * 0.32) = 0.11. (2)
To determine the indirect effect of Information asymmetry on flrm-wide
performance, a path from information asymmetry to flrm-wide performance
can be determined by using equation 3:
Pl.4 = (P..2*P2.3'P3,4) + (P,.3*P3.4) O)
= 0.028 + 0.058 = 0.086.
From these calculations. It is clear that both Information asymmetry and
participative budgeting have separate, weak, indirect effects on flrm-wide
performance, neither being significant.

DISCUSSION
Almost all of the extant empirical research on participative budgeting
has focused on testing whether participation affects consequences such as
motivation, satisfaction and performance. Comparative analysis of these
studies reveals that there is diversity in terms of theories, variables and
results, and thus, no coherent explanation for the consequences of partici-
pative budgeting or its antecedents. In this paper, we have argued that in
order for research to make progress towards increasing understanding of
participative budgeting, it should focus on explaining its antecedents and
then link that explanation to its consequences.
To provide an example of this approach, we developed and tested a
model of participative budgeting which has asymmetrical information as

*rhe following multiple regression was used to estimate the variance of P^ 3, which in tum
allowed the calculation of the standardized regression coefficient or path coefiicient: Y(XJ =
276 Journal of Management Accounting Research, FaU 1993

the antecedent and budget-based Incentives and flrm-wide performance

as the consequences (Figure 1). Analysis of survey data from S&P 500 firms
by path analysis provided evidence which statistically supported each of
the four hypotheses.^ While the empirical tests provided support for the
model, most of the variance In the use of participative budgeting remained
unexplained. Some of the unexplained variance is due to measurement
problems, but much more of this variance is probably the result of an
incomplete model. Further, the questions regarding budget-based incen-
tives and firm-wide performance were of a sensitive nature and probably
limited the response rate. The low response rate is an acknowledged limi-
tation of the study.
The information asymmetry explanation tested in this paper is based
on the assumption that an important source of the demand for participa-
tive budgeting is information sharing. Specifically, participative budgeting
is used by a superior to learn about the better local information possessed
by subordinate managers. The superior can then design a budget-based
incentive system which is conditioned on the information acquired during
the participative budgeting process. Motivation to perform Is provided by
this incentive system, and firm-wide performance is a direct function of
the extent of budget-based incentives.
While the critical assumptions underpinning this explanation are that
participation is used for information sharing and that motivation to ex-
pend effort is provided by budget-based incentives, their effects are not
necessarily inconsistent with those tested by the extant research on par-
ticipative budgeting's consequences. The incentive system is intended to
motivate goal, behavioral and risk congruent behavior. The information
asymmetry explanation which Is supported by both theory and data, does
not provide a complete explanation for the existence of participative bud-
geting. Three other sets of antecedent conditions could provide a richer
explanation for the demand for participative budgeting. We have labeled
these as the desire to Improve individual attitudes, behavior and performance,
reinforcing a particular culture and providing a mechanismjor organizational
learning .
Desire to Affect Individual Attitudes. Behavior and Performance.
One reason for initiating participative budgeting Is that it can increase
an individual's morale, commitment, motivation and Job satisfaction. Fur-
ther, increases in these variables are thought to improve performance
[Becker and Green. 1962; Locke and Schweiger. 19791. However, to test
this effect of participative budgeting requires that measurements of these
variables be obtained before and after participation. Unfortunately, few. if

^The survey evidence presented is subject to the usuaJ potenUal limitations of surveys iBimberg
et al., 1990). For example, there could be a response or non-response bias. iTie controllers
who responded may be involved with the design and operation of these elements of their
Rrm's management accounting control system, while those who did not respond may not
have been involved and hence felt uncomJortable in providing the Information requested.
Another anecdotal explanation, from the corporate controller of a major U.S. firm, is
questionnaire overload. This individual claimed that, since controllers are asked to fill out
approximately three questionnaires a day, they soon beconie selective, lt could be that those
who responded prioritized ours as a questionnaire in which they were interested.
Shields and Young 277

any. studies have reported such pre- and post-treatment effects. Thus,
there Is little evidence available about whether participation increases —
or otherwise affects — morale, commitment, motivation, satisfaction or
performance.
Reinforcing a Particuiar Cuiture
Another explanation for the demand for participative budgeting is that
it provides a means to transmit and reinforce a particular organizational
culture. Defining culture as the beliefs, values and goals which distinguish
the members of one organization from another (Hofstede. 1980] provides a
direct link between culture and budgeting. Since budgeting is a process
used by superiors and subordinates to communicate beliefs (e.g., a subor-
dinate informs a superior about the probability distribution of a local un-
controllable variable), values (e.g., a superior informs a subordinate about
preferences for various actions) and goals, it can be an effective way to
transmit and reinforce the intended cultural relations among employees.
With this view, participative budgeting could be used when there is a change
in the desired culture or the existing culture has deviated from what was
intended. In either case, superiors could use participative budgeting as a
means to alter or to reinforce the current culture.
Another way in which culture can create variation in the demand for
participative budgeting is through its effect on national culture. Hofstede
(19801 provides evidence that the level of power distance — the extent to
which a society accepts an unequal vertical distribution of power in orga-
nizations — varies by country. Variation in power distance results in dif-
ferences in preferences for participation in decision-making. Those in high
power distance countries tend to accept the idea that decisions are made
by leaders and that others implement those decisions. In contrast, in low
power distance countries, there are more feelings of equality and, thus,
everyone should be involved with decision making. The implication is that
national culture can affect participative budgeting directly. There also can
be an indirect effect through its affects on organizational culture.
Providing a Meclianism for Organizationai Learning
Another explanation for the demand for participative budgeting relates
to organizational learning. Organizational learning deals with how a flrm
(as opposed to an individual) learns and stores information in organiza-
tional memoiy for future use (Fiol and Lyles, 1985: Levitt and Man:h, 19881.^
Management accounting procedures can be interpreted as components of
organizational learning. For example, budgeting is a process which organi-
zations use to solve problems (e.g.. to learn about better ways to perform
activities), to share this information across vertical and horizontal levels,
and to serve as an organizational memory for storing information. Thus.
participative budgeting can be used by organizations to learn how to solve
problems and to transmit information to improve performance. An illus-
tration of using participative budgeting to increase organizational learning

^See also the entire February 1991 issue of Organizational Science which is devoted to studies
on organizational learning.
278 Journal of Management Accounting Research. Fall 1993

Is provided by Simons [19871 who describes how Johnson & Johnson uses
extensive participative budgeting as a means of learning about the eco-
nomic implications of new scientific, regulatory and market information in
formulating competitive strategies. This information was transmitted
throughout the firm by the participation process. The implication of this
model Is that participative budgeting arises in response to the need for an
organization to learn about its environment, which may correspond to the
difference between Its present knowledge state and a more knowledgeable
information state. Thus, as the firm's Ignorance about Its environment in-
creases, participation becomes more valuable as a means of generating
and communicating information.

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