The effects of rollover options and interpersonal trust on budgetary slack

Abstract

This study experimentally examines the effect of two factors, the type of budgetary process and the level of perceived interpersonal trust by subordinates towards their superiors, on subordinates’ propensity to include slack in their budgets and the amounts of slack they individually create. I propose that, where the budget preparation process includes an option to rollover existing budgetary information, subordinates have greater propensity to create slack, although in smaller amounts, than where a rollover option is absent from the process. I further propose that subordinates who perceive a low level of interpersonal trust towards their superiors have greater propensity to create slack, and create it in higher amounts, than where their perception of interpersonal trust is high. I also propose that the two factors interact, so that the difference in propensity to create slack and the difference in the amounts created between the two treatments of budgetary process, are greater where subordinates perceive a low level of interpersonal trust towards their superiors than where this perception is high. In order to mitigate social desirability bias, participants are asked, as third party observers, to predict whether subordinates would create budgetary slack in the experimental scenario. I find that subordinates have greater propensity to create slack where the budgetary process includes a rollover option and smaller amounts are created, than where a rollover option is absent. I did not find any difference in subordinates’ propensity to create slack that was associated with the perceived level of interpersonal trust towards their superiors. However, subordinates create greater amounts of slack where their perceived interpersonal trust is low. I did not find support for the predicted interaction effect. These findings suggest that the antecedents of the propensity to create budgetary slack can differ from the antecedents of the amounts created, and therefore, in practice, each may require differing forms of mitigation. The finding that rollover options increase the propensity to create slack suggests a point of caution for practitioners of rolling budgets. This study extends prior literature by finding that perceived interpersonal trust did not affect the propensity to create slack, just the amount created.