The Hidden Effect of Historical Information on Managerial Honesty in Participative Budgeting

Managers can often access historical budget information during the budgeting process. In this study, I investigate the influence of this information on managers’ budget reporting honesty in the upcoming periods. The findings from a laboratory experiment reveal that managers report more honestly when the past cost budgets are low than when the past cost budgets are high. The analyses suggest that motivated reasoning processes rather than anchoring lead to this result, which means that high past budgets provide managers with ample room for making opportunistic reinterpretations, whereas low past budgets decrease this moral wiggle room. Furthermore, if the past budgets are both high and low, managers report less honestly than when past budgets are only low. In the former case, having information about one high past budget already provides enough room to justify opportunistic reporting. Supplemental analyses suggest that managers’ honesty converges over time, once past budget information is no longer communicated to them. Organizations may consider these hidden effects when communicating historical information in participative budgeting