Vertical Pay Dispersion, Peer Observability, and Misreporting in a Participative Budgeting Setting

Posted: 18 Jul 2019

See all articles by Lan Guo

Lan Guo

Wilfrid Laurier University

Theresa Libby

Kenneth G. Dixon School of Accounting - University of Central Florida

Xiaotao Kelvin Liu

Northeastern University - Accounting Group

Yu Tian

University of Central Florida - Kenneth G. Dixon School of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: March 19, 2019

Abstract

In this study, we examine the joint effect of vertical pay dispersion and peer observability on subordinates’ misreporting choices. We adopt a participative budgeting setting in which two subordinates report to one superior, and we manipulate vertical pay dispersion (low/high) and peer observability (absent/present). Subordinates have private information about actual project costs and can over-report project costs to the superior without detection and thus, create budgetary slack. When a peer’s reporting choices are observable, we predict and find that peer reporting choices have an asymmetric influence on the focal subordinates’ reporting choices, and this asymmetric influence depends on the level of vertical pay dispersion. Specifically, we find that when vertical pay dispersion is low, subordinates who observe peer reports containing low slack misreport less, whereas observing peer reports that contain high slack has no significant effect. However, when vertical pay dispersion is high, subordinates who observe peer reports containing high slack misreport more, whereas observing peer reports that contain low slack has no significant effect. Driven by these asymmetric effects, subordinates misreport less in the presence of peer observability than in its absence when vertical pay dispersion is low and misreport more in the presence of peer observability than in its absence when vertical pay dispersion is high. Overall, our findings suggest when a firm has a more egalitarian pay structure (i.e., low vertical pay dispersion), an open information policy is conducive to a more honest reporting environment; whereas under a more hierarchical pay structure (i.e., high vertical pay dispersion), open information policies can compromise the honesty of subordinates’ reports.

Keywords: vertical pay dispersion, peer observability, misreporting, fairness, social norms

Suggested Citation

Guo, Lan and Libby, Theresa and Liu, Xiaotao Kelvin and Tian, Yu, Vertical Pay Dispersion, Peer Observability, and Misreporting in a Participative Budgeting Setting (March 19, 2019). Contemporary Accounting Research, Forthcoming, Northeastern U. D’Amore-McKim School of Business Research Paper No. 3406040, Available at SSRN: https://ssrn.com/abstract=3406040

Lan Guo

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5
Canada

Theresa Libby

Kenneth G. Dixon School of Accounting - University of Central Florida ( email )

Orlando, FL
United States

Xiaotao Kelvin Liu (Contact Author)

Northeastern University - Accounting Group ( email )

404B Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States
617-373-5926 (Phone)

Yu Tian

University of Central Florida - Kenneth G. Dixon School of Accounting ( email )

University of Central Florida
P.O. Box 161400
Orlando, FL 32816-1400
United States

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