Participative Budgeting, Psychological Contracts, and Honesty of Communication

47 Pages Posted: 15 Aug 2011 Last revised: 11 Jul 2012

See all articles by Ranjani Krishnan

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems

Eric Marinich

Michigan State University - Department of Accounting & Information Systems

Michael D. Shields

Michigan State University - Department of Accounting & Information Systems

Date Written: June 7, 2012

Abstract

This study provides experimental evidence on the effects of breach of subordinates’ psychological contracts on honesty of communications under participative budgeting. While participative budgeting can improve economic outcomes, it can also establish psychological contracts whereby subordinates expect their superiors to fulfill the promise of participation. When these expectations are not met, subordinates’ psychological contracts are breached leading to feelings of violation. To redress the breach, subordinates will respond with less honest budgetary communications relative to subordinates whose psychological contracts are fulfilled. Importantly, psychological contract breach can occur even when the terms of the economic contract are fulfilled. Experimental results indicate that breach of subordinates’ psychological contracts of participative budgeting is associated with lower levels of honesty, even when there is no economic benefit from dishonest communication. Furthermore, the effects of previous psychological contract breach on honesty persist into future periods, even when psychological contracts are no longer breached.

Keywords: Budgeting, Participative Budgeting, Psychological Contracts, Honesty

JEL Classification: M40

Suggested Citation

Krishnan, Ranjani and Marinich, Eric and Shields, Michael D., Participative Budgeting, Psychological Contracts, and Honesty of Communication (June 7, 2012). AAA 2012 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1910226 or http://dx.doi.org/10.2139/ssrn.1910226

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-353-4687 (Phone)
517-432-1101 (Fax)

Eric Marinich (Contact Author)

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-353-8114 (Phone)
517-432-1101 (Fax)

Michael D. Shields

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

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