Budgeting, Psychological Contracts, and Budgetary Misreporting

52 Pages Posted: 13 Aug 2015 Last revised: 30 Jan 2018

See all articles by Susanna Gallani

Susanna Gallani

Harvard Business School

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems

Eric Marinich

Miami University of Ohio - Richard T. Farmer School of Business Administration

Michael D. Shields

Michigan State University - Department of Accounting & Information Systems

Date Written: January 2018

Abstract

This study examines the effect of psychological contract breach on budgetary misreporting. Psychological contracts are mental models or schemas that govern how employees understand their exchange relationships with their employers. Psychological contract breach leads to feelings of violation and can occur even when employees’ economic contracts are fulfilled. We study the effects of psychological contract breach on three common types of employee participation in budgeting that differ in the degree of employees’ influence over their approved budgets. These include affirmative budgeting (full influence), consultative budgeting (moderate influence), and authoritative budgeting (low influence). When organizations communicate that employees will be involved in budgeting, employees develop psychological contracts of affirmative budgeting. If employees subsequently experience authoritative or consultative budgeting, their psychological contracts are breached. Employees who experience psychological contract breach seek redress through budgetary misreporting. Experimental results indicate that psychological contract breach partially mediates the relation between budgeting type and budgetary misreporting. Results also indicate asymmetry in the effects of psychological contract breach versus repair. Effects of breach on budgetary misreporting persist even after the breach no longer occurs.

Keywords: Psychological Contract, Budgeting, Misreporting

JEL Classification: L14, M40, M41, M55

Suggested Citation

Gallani, Susanna and Krishnan, Ranjani and Marinich, Eric and Shields, Michael D., Budgeting, Psychological Contracts, and Budgetary Misreporting (January 2018). Harvard Business School Accounting & Management Unit Working Paper No. 16-017. Available at SSRN: https://ssrn.com/abstract=2642861 or http://dx.doi.org/10.2139/ssrn.2642861

Susanna Gallani (Contact Author)

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States

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

Miami University of Ohio - Richard T. Farmer School of Business Administration ( email )

Oxford, OH 45056
United States

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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