Collusion in Capital Budgeting Process

31 Pages Posted: 15 Jan 2012

See all articles by Darlene Bay

Darlene Bay

Brock University - Accounting

Gail Lynn Cook

Brock University

Nadharatch (Patrick) Ounlert

affiliation not provided to SSRN

Parunchana Pacharn

Brock University

Date Written: January 14, 2012

Abstract

In response to the ever present concern about manager’s honest reporting and the need to control budgetary slack, a number of management control mechanisms have been proposed. Classical agency literature focuses on analytical solutions to identify the “best” mechanism to control this agency problem. However, experimental management accounting research has shown that individuals do not behave as opportunistically as predicted by the agency model. We empirically test one of the proposed control mechanisms in the agency literature – contracts – under different organizational conditions (ethical environment, collusion). Our results indicate that managers report most honestly under a slack contract with a guaranteed transfer of funds. However, managers did not respond to ethical environment manipulations but, did respond to the collusion treatment. Interestingly, this response is in the opposite direction from that predicted. Our results raise important questions for managers attempting to address agency questions.

Keywords: Collusion, Capital Budgeting, Ethics

JEL Classification: C70, M40

Suggested Citation

Bay, Darlene and Cook, Gail Lynn and Ounlert, Nadharatch (Patrick) and Pacharn, Parunchana, Collusion in Capital Budgeting Process (January 14, 2012). CAAA Annual Conference 2012, Available at SSRN: https://ssrn.com/abstract=1985360 or http://dx.doi.org/10.2139/ssrn.1985360

Darlene Bay

Brock University - Accounting ( email )

St. Catharines, Ontario L2S 3A1
Canada

Gail Lynn Cook

Brock University ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Nadharatch (Patrick) Ounlert

affiliation not provided to SSRN ( email )

Parunchana Pacharn (Contact Author)

Brock University ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

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