The Effects of Forecast Precision and Time Pressure on Motives to Create Budget Slack

38 Pages Posted: 8 Jul 2021

See all articles by Anne M. Farrell

Anne M. Farrell

Miami University Farmer School of Business - Department of Accountancy

Sean A. Peffer

University of Kentucky - Gatton College of Business and Economics

Kristian Rotaru

Department of Accounting, Monash Business School

Axel K-D Schulz

La Trobe University

Date Written: June 15, 2021

Abstract

Budgets are used in organizations for planning and resource allocation, and supervisors typically seek employees’ specific knowledge to develop budget targets. In practice, however, employees rarely know future resource needs with certainty at the time budgets are prepared. Moreover, budgets are often also used for motivation and evaluation, with employees’ implicit and/or explicit rewards and punishments tied to achievement of budget targets. We extend prior research on participative budgeting by examining whether the precision of employees’ forecasts of future resource needs impacts the extent to which they create budget slack (defined as seeking more resources than needed). We also examine whether a common contextual feature of work environments, as well as a mechanism supervisors could implement—increasing the time pressure on employees submitting budget information—reduces slack. Results of two laboratory experiments indicate that relative to precise forecasts, employees with imprecise forecasts increase budget slack, but only when there is an explicit monetary incentive to create slack. Imposing time pressure on budget submissions reduces that slack. Our design allows us to understand the effects of employees’ motives of honesty, personal wealth, and mitigating the uncertainty created by imprecise forecasts on slack creation. Overall, our results illustrate how two factors common in increasingly volatile and uncertain work environments—forecast precision and the need to produce budgets quickly—impact the value to firms of using budgets for planning and resource allocation decisions.

Keywords: Budget slack; forecast precision; time pressure; honesty

JEL Classification: M40, M41, M49

Suggested Citation

Farrell, Anne M. and Peffer, Sean and Rotaru, Kristian and Schulz, Axel K-D, The Effects of Forecast Precision and Time Pressure on Motives to Create Budget Slack (June 15, 2021). Available at SSRN: https://ssrn.com/abstract=3874286 or http://dx.doi.org/10.2139/ssrn.3874286

Anne M. Farrell (Contact Author)

Miami University Farmer School of Business - Department of Accountancy ( email )

800 East High Street
3094 Department of Accountancy / MSC 1002
Oxford, OH 45056
United States

Sean Peffer

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
606-257-3149 (Phone)
606-257-3654 (Fax)

Kristian Rotaru

Department of Accounting, Monash Business School ( email )

900 Dandenong Rd
Caulfield East, Victoria 3145
Australia
+613-990-34567 (Phone)

Axel K-D Schulz

La Trobe University ( email )

Victoria 3552, 3086
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
111
Abstract Views
544
rank
352,227
PlumX Metrics