A decade of Budgeting Research -Developments and trends in budgeting research in the new millennium-

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MSC O&MC Rijksuniversiteit Groningen

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A decade of Budgeting Research

-Developments and trends in budgeting

research in the new millennium-

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Preface

The paper in front of you is named ‘A decade of budgeting research – Developments and trends in budgeting research in the new millennium’. A Management Accounting research narrowed down to the topic of Internal Budgeting. This thesis is written as the final

assignment for they Business Administration master, Organizational & Management Control at the Finance and Business Faculty of the Rijksuniversiteit Groningen.

The objective of this paper is to create insight in all the facets of internal budgeting which has been researched since more than 70 years. Without a doubt, the topic has developed ever since, however this assignment is narrowed down to the last 10 years. The aim is to determine which general accepted relations have matured through time and which

contribution to the topic have emerged. Finally, the results will produce a guide for the next ten years of budgeting research to come with possibilities for theory and research method development.

This research is performed during the period from September 2010 till October 2011. The assignment was constructed by Dr. B. Crom, who is a member of the Accounting division of the Finance and Business Faculty. Additionally, Dr. Crom choose to be my supervisor and has supported me throughout the process of writing with constructive criticism and endless patience.

Further I would like to thank Dr. Crom and everybody who supported me during the research.

Amsterdam, 14th November 2011

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3 Preface 2

3 1 Introduction

5 1.1 Origination

5 1.2 Development

5 2 Motivation for the study

7 2.1 Research purpose

7 2.2 Motivation

7 3 Methodology

11 3.1 Taxonomy method

11 3.2 Frequency distribution

12 3.3 Methods and organizations

12 3.4 Future research

12 3.5 Data

13 3.6 Research areas

14 3.7 Research methods

15 4 Results taxonomy

16 4.1 Article content analysis

16 4.2 Trend analysis

21 4.3 Concluding remark

23 5 Theory development

24 6 Methodologies and respondents

26 6.1 Research areas

26 6.2 Research methods

27 6.3 ‘For profit’ vs. ‘Not for profit’ organizations

32 7 Future research

33 8 Conclusion

36 Appendix I

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A decade of Budgeting Research

-Developments and trends in budgeting research in the new millennium-

Abstract ________

Budgeting research has been one of the most important research areas since the 1950’s. Many reviews have been done with different goals and motivations. This research has reviewed the publications on the subject for the first ten years since 2000 for five eminent journals. We seek to determine whether a publication trend can be distinguished and how this affects future research. The results show that there are some newly developed theories in the area of Social Values and reputational

considerations in budget setting, budget quality or accuracy evaluation and its effect on budget slack, as well as non-economic incentives driving productivity. Despite budgeting being such an advanced subject in management accounting, it leaves many niches for future research on upcoming subjects such as work related values and reputational considerations in budgeting.

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5 1 Introduction

1.1 Origination

In the final years of nineteenth century, scientific management was developed in the USA. Standard costing and budgetary control, or budgeting, were the main features associated with the adoption of scientific management (BLPES, 1987).

Although budgeting was originally developed in the beginning of the twentieth century, it took until the end of the 1950’s that budgeting development accelerated, led by a general

advancement of management accounting literature (Edwards et al., 2002). In this period, OECCA (1951) published a definition of budgeting as being:

‘A set of coordinated forecasts for a limited period of time, generally the year, established so as to allow early identification of operating conditions and Profit and ~Loss account items, dividing these forecasts up in such a way that it is possible to appoint a person responsible for each one, systematic reconciliation at fixed periods, generally monthly, of the actual results in the various management areas with the forecast results, speedy communication of the related information not only to the management, but to the persons responsible, down to fairly low levels in the hierarchy’

1.2 Development

Budgeting has been developed over the years as a useful management accounting tool. Previous research has determined that the use of budgets has four main focuses, ‘or reasons to budget’ (Hansen and Van der Stede, 2004).

These four main focuses are budgeting being used for operational planning, performance evaluation, communication of goals and strategy formation.

Argyris’(1952) research was the first to recognize that to use budgeting as a positive

moderator several other, mainly behavioral variables, were important. One of the findings was that budget participation depended on the type of leadership executed in the organization. With his research Argyris (1952) was the first to go beyond examining accounting information as a performance evaluation tool (Briers and Hirst, 1990).

In later publications, when budgeting research had become more developed, researchers tended to more cross-sectional researches. The research types became more experimental and empirical (Briers and Hirst, 1990).

The focus of the budgeting researches were many times the relation of the budgeting

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Publications in the 1990 period refer many times to the impact of budgeting on the difficulty of employee tasks and the motivation incurred to make proper use of the tools provided (e.g. Lokman, 1989, Lau, 1998). Otley and Pollanen (2000) even stated that it has been the major contribution of accounting literature to draw attention to the impact accounting systems have on the behavior of humans and vice versa.

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7 2 Motivation for the study

2.1 Research purpose

While organizations start the adoption of accounting systems as they mature, one of the first systems adopted in an organization is still budgeting. However, the older the company is the more systems it has adopted (Davila and Foster, 2005). This is one of the reasons why budgeting has an important role in management accounting literature after all these years. The aim of this paper is to research (internal) budgeting publications and research how the topics addressed for the different budgeting purposes have developed during the last ten year period.

To reach this goal the paper surveys recent literature on budgeting in the 21st century. It reviews publications in five eminent journals which have management accounting as their most important publication theme. The review covers a ten-year period from the year 2000 till the year 2010.

2.2 Motivation

Management accounting research is subject to reviews frequently. Many times these reviews concern the contributions of particular journals, which have management accounting as their primary subject, in one particular period of time. Others review the contributions of particular subjects of management accounting.

The following section addresses several relevant prior reviews on budgeting. The next paragraph elaborates on prior work on budgeting and the type of review the authors chose for their researches. These prior researches have some similar objectives with this paper which this research seeks to combine. These earlier works have different objectives, some

accomplished a more in-depth view on specialists topics while others assessed the research state for a broader field. Therefore the second paragraph formulates the research objectives for this review and which questions it seeks to answer. By stating the objectives it is possible to extract the characteristics of the research setting to reach these objectives.

The final paragraph of this chapter will describe how this research differs from earlier reviews. The part describes which characteristics of the prior work is combined to reach the set research objectives and create a proper image of the state of research on budgeting.

2.2.1 Prior reviews

Budgeting has been subject to review frequently in many different settings. To contribute to existing literature this paper seeks to distinguish form earlier work. Many researchers choose to review the contributions of one particular journal.

Lindquist and Smith (2009) have reviewed the contributions of management accounting research in the Journal of Management Accounting Research (JMAR), the Journal of Accounting Research (JAR) on the management accounting contributions was reviewed by Dyckman and Zeff (1984) Heck and Bremser (1986) even reviewed sixty years of The Accounting Review, also on the contribution on management accounting in general.

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Since annual planning and control are most frequently published, one could expect a review on these type of control instruments. However, few reviews are done on the topic of internal budgeting in the past. In emulation of Meyer and Rigsby (2001), who suggested that after establishment an analysis of the contents of journals should be assessed to understand the direction of the publications, this review analyses the contents of budgeting in the latest period. The topic is already established as a management accounting topic and with this analysis the direction of research is analyzed.

Shields (1997) focused on the topics, methods and theories published on in 152 articles publications in seven North American journals on management accounting. Shields (1997) focused on the popularity of the different management accounting topics.

The most popular topics where short-term management control like annual planning and cost control. Less popular were the long-term control subjects like capital budgeting, performance planning and investment decisions.

Shields (1997) included multiple journals in his research, however did not select one particular topic. Instead his research focused on which topics were addressed, with which methods they were researched and how many researches were grounded researched. Kaplan (1993) reviewed management accounting in general. The research focused on the broad array of management accounting topics, with the forwarding looking aim of exploring for research opportunities for future research.

2.2.2 Research objectives and questions

The main objective is to determine which of the budgeting topics were evidently important for researchers to focus on and research.

The research seeks to answer this question by determining the publication frequencies of the different topics. If a particular topic has a higher publication frequency it is considered more important for the development of budgeting research then a topic with a low publication frequency. This objective seeks to answer the question: Which budgeting topics did researchers find evidently important to focus on?

Additionally the research tries to discover a trend in the publication frequencies. The results will display a frequency distribution for the most important budgeting topics per period. These publication frequencies for each topic are compared per period. The objective is to discover if there is a trend in the number of publications. When a topic shows an increasing frequency through time, it is safe to conclude that the subject became more important for budgeting research and vice versa. The objective can be summarized in the question: Are there any trends observed in the published research topics?

The second objective is to discover how these different insights have contributed to budgeting research in general, what has been discovered in this period what researchers did not know before. The results look for relations or conditions under which particular theories hold (Shields and Shields, 1998). The research searches for newly developed theories in the targeted period. Newly developed theories are theories that are not published before in management accounting literature. Which of the published researches provided new insights or extension on established theory?

The third objective is to determine how the researchers have come to their conclusions. The results will display the research topic as well as the research setting and research method. This method is adapted from the research done by Shields (1997) and suits this research well because it’s reviewing character of a similar time span. It will be elaborated on more

extensively in the methodology section.

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The final objective of this paper is to address the research opportunities in budgeting

research. The research summarizes the recommendation for future research from the target period publications. When there was no follow-up on this recommendation it is maintained as a future research possibility.

Finally the results address which of the budgeting subjects still deserve researchers’ attention. More importantly is the reason of this attention. Integrated in the final remarks on future budgeting research is a review on the hurdles encountered in past research and how these should be tackled in the future. The result of this research objective seeks to answer the questions: Which topics still deserve more attention for future researches and why? Are there possibilities for theory development?

2.2.3 Difference with earlier reviews

This paper aims to review the budgeting publications exclusively instead of focusing on management accounting. It chooses to narrow its scope to the contributions of one topic. This review is different from earlier reviews because it combines the characteristics of several earlier research types. First, annual planning and budgeting remain the topics most published on (Shields, 1997). It has therefore earned a reason for review, since it has not been done before with a similar approach. This paper uses the characteristic of the review by Baiman (1990) on agency theory, because it focuses on a smaller niche in management accounting research, budgeting research.

Baiman (1990) gathered data from several journals, which is a similar approach to the research method this paper is based on. Much earlier work focuses on the contributions of one particular journal (Dyckman and Zeff, 1984; Heck and Bremser, 1986). To establish a more objective approach, this work chooses to follow Baiman (1990) and gather data from several journals to create a wider perspective on the subject. This paper selects five management accounting journals.

Second, this research analyses the contents of budgeting research for the last ten years to gain understanding in the direction of research for the topic.

Here the paper does not combine the characteristic of earlier work, however follows the recommendation of Meyer and Rigsby (2001) who suggest frequent review for all established topics. This has not been done for the management accounting topic budgeting.

Third, the results of this paper will elaborate on the research methods the publications from the target period used for research and follows the approach of Shields (1997) and Lindquist and Smith (2009). Shields (1997, pp. 8 – 13) describes the frequencies of the different research methods in the results of his paper and describes the purpose of these different methods. Lindquist and Smith use the same method to determine the frequencies of the research methods, however their results (pp. 260 -264) analyze which research methods are used for particular research settings. This approach contributes to understanding the direction of research as recommended by Meyer and Rigsby (2001) and combines the Lindquist and Smith (2009) with the method from Shields (1997), who reviewed and analyzed the publications of a similar time-span.

Finally, the analysis for future research possibilities is provided to determine research areas which are not researched before.

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2.2.4 Paper organization

The paper is arranged as follows. The third chapter describes the methodology of the empirical part of the review. The part describes the framework which Shields (1997) developed for management accounting research, the taxonomy method. This method is suitable to determine the state of research for one particular topic.

In the fourth chapter of the paper the topics most frequently published in the target period are addressed. The frequencies are displayed and noticeable trends are described, when applicable.

The fifth chapter summarizes the theories which arise from the target period literature and describe under which circumstances these theories hold.

The sixth chapter addresses the methodologies used for the researches and the settings in which they were executed.

The seventh chapter analyzes the possibilities for future research according to the prior recommendations from the publications from the target period.

The eighth chapter provides concluding remarks on this paper and some general recommendations on future budgeting research.

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11 3 Methodology

This chapter describes the research methodology and how this supports the research objectives. The first paragraph describes how the taxonomy method, adopted from Shields (1997), is integrated in the analysis to gain insight in the development of budgeting research. It also explains how the article content analysis will contribute to the eventual trend analysis. This trend analysis is described in the second paragraph and gives more details on the final execution. The third paragraph describes the distribution of the research methods in the different research areas. Additionally, the section addresses the organization types the researchers choose to research. The third paragraph describes how the research methods used in the target period publications are inventoried, as well as the organizations they were employed in.

The fourth paragraph provides insight in how this paper seeks to gain understanding in the future research possibilities. Then the selected journals are explained and finally the determination of the research areas is provided.

3.1 Taxonomy method

The paper categorizes the contents of each paper on budgeting on several characteristics. The method for this categorization is the taxonomy method and is adopted from Shields (1997).

Article content analysis

The method taxonomies the content of the selected publications by means of an article content analysis. The subjects researched in relation to budgeting in the reviewed

publications are summarized as being a ‘topic’ of the publication. The result is an overview of the topics addressed in the target period. Generally the publications consist of two to five topics each.

Shields used the technique to review the state of management accounting research in general. In order to fit the method to this review it is narrowed down and covers budgeting topics solely.

From the taxonomy of the articles the following characteristics are derived; (1)Title; The full title of the publication

(2)Author(s); The names of the researchers involved (3)Date; The year of publication

(4)Topic; Represents the research topic and in short contains the specific budgeting topic(s) addressed in the assessed papers, by ‘article content analysis’

(5)Setting; The setting in which the experiment of survey is executed or the data derived (6)Theory; The theory on which the research is based, or which effect it researches (7)Research method; The method with which the researchers choose to research the topic (8)Results; Repeats the main findings of the publication with the relations between the variables

(9) Future research recommendations; If applicable sums up the recommendations for future research on the subjects addressed or how to extent the topic in the future.

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3.2 Frequency distribution

The methodology uses a trend analysis to observe if there are any noticeable trends in the research topics published on. The trend analysis is performed by means of a frequency distribution to review the popularity of the topics. This analysis is performed periodically. Due to the limited number of publications, the target period is divided in two periods, one for each five-year time span. Period 1 represents the 2000 till 2005 period and period 2 represents the 2006 till 2010 period.

The frequency distributions of the subsequent accumulated topics per period are compared to analyze any shifts in topic frequencies. An increase in frequency represents an increase in popularity and vice-versa.

3.3 Methods and organizations

To answer the third research objective of assessing which methodologies, research settings and data sources the researchers used, the frequencies of the methodologies for the different research areas are distributed. From these results can be derived how the researchers have come to their conclusions and from which type of organizations they have drawn their data primarily.

3.4 Future research

Finally, in order to look for future research possibilities the results use the knowledge this work gains on theories from the target period and combines them with future research settings.

The recommendations for future research of each paper are categorized with the same taxonomy method. This is an extra column in the table which displays the recommendations for future research for the analyzed publication. The result is an overview of the

recommended future research areas. If these recommendations are compared with the performed researches in the following period, this results in recommendations for research which have not been done yet.

These results will be combined with recommendations for research from publications from the final years of the target period.

Combined with the knowledge of new theory from the target period, this work will strive for recommendations for future theory development possibilities.

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13 3.5 Data

Five journals are selected as a basis for the research. These five journals are chosen

because of a similar research performed by van Helden (2000) and because they represent a wide international coverage of management accounting research.

These five journals are:

 Management Accounting Research

 Journal of Management Accounting Research  Accounting Review,

 Accounting, Auditing and Accountability Journal  Accounting, Organizations and Society

From these five journals the publications on budgeting are extracted. The journals chosen are commonly used internationally as reference for research and evaluation.

The research identifies the topics for publications across the years 2000 till the end of 2010. All the relevant topics which include or are researched in relation to budgeting are selected. For this target period a total of 47 publications were selected for analysis.

The topic capital budgeting is excluded from the research, since this accounting measure may be considered to be a finance subject rather than a management accounting subject.

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3.6 Research areas

The publications are divided in three main research areas and are organized by the publications’ chronology. This division is made to create clear boundaries in the bulk of publications.

The reason for this particular division is adopted from the work of Shields (1997) and Lindquist and Smith (2009). These prior researches have concluded that there are many cross-sectional researches. The cross-sectional research area represents a research area which crosses boundaries with other academic specialties, such as psychology, sociology or economy. However, since this work elaborates on one specific topic in management

accounting, not all the researches from the target period are cross-sectional.

Therefore this paper has determined more research areas, the theoretical and the field based research area.

The division supports the aim to create a more in depth understanding on the topic budgeting. The majority of the publications consists of cross-sectional researches, however many are strictly management accounting based. These are organized by research method and are theoretical, consisting of literature reviews or experiments, or field based, consisting of business survey or questionnaires in organizations.

Finally, after this division some separate topics remain which earn a place in the separate topic research area.

A remark has to be placed by this division. Some publications may be suitable for two research areas. For example, some of the publications may be field based, however have a stronger cross-sectional character and are integrated in that research area accordingly.

Cross‐sectional research

The first area is the cross-sectional budgeting research and consists of different types of research methodologies. The publications in the research area address theories which are researched both in literature and practice.

The common characteristic in the cross-sectional research area is the linkage of other

academic specializations with budgeting research. The publications research budgeting topics in respect to other disciplines, such as psychology or sociology.

Theoretical research

The second research area is the theoretical research, which consists mainly of theoretical approaches with experimental researches and literature reviews.

Field research

The third area is the field based budgeting research, which addresses organizations where budgeting use is analyzed in the field. The area consists mainly of case studies and empirical surveys executed in organizations that use budgeting. The organizational types may vary widely. Both ‘for’ and ‘not for profit’ organizations, service and producing organizations, municipalities or school can be subject to these field based researches.

Separate topics

Next to the three research areas, there are some separate topics in the target period which shed an in depth light on specialist subjects. These topics do not necessarily represent the research direction of the target period, however are important for the development of budgeting research. Therefore these subjects are addressed separately.

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15 3.7 Research methods

Chapter six describes thefrequencies of the research methods used in the target period publications. The separate categories are adapted from Lindquist and Smith (2009). However, the categories are adapted to fit this research. The field category has already been integrated in the research area division. Additionally, the archival category is divided among the other categories.

The research methods’ distribution is researched to answer the third research objective how the researchers have come to their conclusions.

Following the Lindquist and Smith (2009) research, the research methods are labeled:

 Case study  Experiment  Survey  Questionnaire  Review  Empirical

The case studies investigate budgeting issues budgeting issues in within a single

organizations, where multi-case studies do the same for multiple organizations, where the organizations are treated as an entity.

Experimental studies usually entail human participants to complete laboratory tasks, sourced from other academic fields.

Surveys are the methods where individuals or parts of (multiple) organizations are researched relating to the budgeting measures they use. The method differs from the experiments because the subjects researched are operating in their own environment without manipulations or pre-set influences. It differs from case studies because the case study method uses the entire organization as an entity where the survey uses a part of the individuals employed.

Questionnaire methods are publications where researchers used exclusively the distribution of questionnaires to gather data.

Review publications provide reviews of prior publications on budgeting topics.

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4 Results taxonomy

Chapter four explains the results of the taxonomy method. The product of this method is an analysis on the contents of the publications, as well as the trend analysis, derived from the frequency distribution. The first paragraph contains the outcomes of the article content analysis over all the research areas. The second paragraph will explain to which topics the researchers have chosen to give their attention. Finally some remarks on the trends are provided in the last paragraph.

This chapter seeks to answer the research questions:

Which topics did researchers find evidently important to focus on? Are there any trends observed in the published research topics?

4.1 Article content analysis

This paragraph provides evidence on the topics the researchers choose for their publications, as well as for the popularity of these topics. Table 1 provides an overview of the frequencies for all the topics mentioned in the target period. The topics are both expressed as an absolute number, as well as a percentage of the total number of topics per period and total of both periods.

A complete overview of the taxonomy method results is presented in appendix I. This table provides the results of the analysis of the 47 publications on budgeting from the target period, presented in a table. Appendix I provides a chronological overview of the publications per research area in which the characteristics of each publication are addressed.

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Topic

period 1 period 2

% period 1 % period 2 total 1+2

% total period Performance

9 5 10% 11%

14

11% Budget slack

6 4 7% 9%

10

8% Information sharing/asymmetry 7 3 8% 7%

10

8% Participation

8 2 9% 4%

10

8% Strategy formation/control

7 3 8% 7%

10

8% Budget setting

7 2 8% 4%

9

7% Budget empasis

7 1 8% 2%

8

6% Ethics

4 3 5% 7%

7

5% Structure (organizational)

2 4 2% 9%

6

5% Activity Based Budgeting

4 1 5% 2%

5

4% Fairness

2 2 2% 4%

4

3% JRT

3 1 3% 2%

4

3% Organizational control

2 0 2% 0%

2

2% Risk management/avoiding

1 2 1% 4%

3

2% Budget Based Contracts

1 2 1% 4%

3

2% Culture

1 2 1% 4%

3

2% Rolling budgets

1 1 1% 2%

2

2% Beyond Budgeting

2 0 2% 0%

2

2% Balanced ScoreCard

1 1 1% 2%

2

2% Budget negotiations

2 1 2% 2%

3

2% Isomorphism

1 1 1% 2%

2

2% Accounting adoption/reliance

2 0 2% 0%

2

2% Learning

1 0 1% 0%

1

1% Other

5 2 6% 4%

7

5%

86 43 100% 100%

129

100%

Table 1: frequencies for publications’ content analysis in all research areas

Top‐five topics

As table 1 shows, the five topics most published on are performance, budget slack,

information (sharing/asymmetry), budget emphasis, participation and strategy. These topics all account for 8% of the total content, or more.

From this analysis we can conclude that budgeting in relation to performance remains the most important topic for researchers to focus on.

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Performance

The topic performance is mentioned 14 times and accounts for 11% of the total contents of the publications. Performance with or without other subjects account for 14 % of the cross-sectional publications with 9 articles referring to performance with or without other variables as part of the content. In the field based budgeting research in the target period it is part of the content in 3 publications, or 7%. Performance was not researched as a topic in the theoretical research.

There are several reasons why the authors have paid considerable attention to the topic. The most important would be the origin of budgeting as performance evaluator and one of the four reasons to budget (Hansen and Van der Stede, 2004).

Performance was many times one of multiple topics in the target period researches, which is supported by the numerous times mentioned in the sectional studies. In these cross-sectional publications, the majority of performance research concentrated on the social and reputational aspects of budgeting use in relation to performance.

The social values and reputational considerations on group performance was the motivator for Fisher et al. (2003) to devote a research to the topic.

The relation with resource allocation also contributed to the popularity of performance as a research topic. In these researches the relation between forecasted performance and the allocation of scarce resources was researched. This relation was the motivation to devote research. Rankin, Schwartz and Young (2008) stated that subordinates have incentives to overstate their productivity to acquire scare resources. A conclusion in line with prior research by Fisher et al. (2002).

Finally, the performance under different control tightness’s was researched, which is topic seen frequently prior to the target period.

The relations of performance with many social and reputational aspects, indicates that the topic remains important for researchers, since there are still many motivations to devote research to the topic. Also, the increasing numbers of crossing academic specialism indicates that the research is maturing. Researchers search for improvement in other disciplines to extend the knowledge on budgeting as a performance tool.

Slack

Budget slack is the second most popular topic in the publications. Overall slack is 10 times the main content or 8% of the total contents of the target period.

In the research areas slack is at least part of the content in 7 of the 23 publications, or 11 % of the total contents in the cross-sectional research area. In the field based research area, slack is mentioned twice and is 5% of the total contents.

Budgeting slack is researched as both positive and negative in accounting literature. The unfavorable approach is to define slack as an inefficiency and managerial self interest that does not contribute to the value of a firm (Leibenstein, 1966; Williamson, 1964). The favorable perspective is that slack can be justified to the budgeting process because it absorbs

performance shocks and helps resolve goals conflict and fosters innovation (Bourgeois, 1981).

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Other researchers question whether slack is favorable or unfavorable. Slack reduction by

varying control types seems a major motivator for researchers. However, combining the researches to the allowance of slack and it trade-off to ensure long-term strategic orientation is important for many authors (e.g. Hansen and Van der Stede, 2001; Davila and Wouters, 2005) or ensure strategic compliance (Van der Stede, 2000).

Information sharing and asymmetry

The target period has 10 publications from which the content, or part of the content, contains information sharing or information asymmetry. Information is 8% of the total contents of the target period. This is distributed among the research areas as 8% of the cross-sectional, 10% of the applied and 5% of theoretical research area.

The existence of information asymmetry contributes to the research popularity of the topic. The motivations for individuals to reduce this asymmetry seems the main motivator for researchers to address the topic. Again reputational considerations seem important for the reduction of information asymmetry and is researched as a variable in information asymmetry reduction and improving information sharing. Stevens (2002) found proof for the negative relation between reputational concerns and information asymmetry, indicating that employees value their reputation and are willing to reduce the advantage of their information superiority to increase or maintain their reputational status. As a result of this willingness to reduce information superiority advantage, more information is shared with superiors.

This information asymmetry reduction effect seems to be the result of the interaction between individuals in setting and exercising the budgets (Parker and Kyj, 2006).

Information sharing is the other subset which triggered many authors to publish on the topic. Budgeting is often used as a goal communication tool (Hansen and Van der Stede, 2004). Other researchers’ reason to devote to the topic are the circumstances and the types of organizations which use budgeting as goal communicator, such as highly interdependent and competitive organizations (Goddard, 2004; Hansen and Van der Stede, 2004; Poon and Tjosvold, 2009).

Participation

Another repeating topic is participation, overall the topic participation accounts for 8% of the total contents and is mentioned 10 times. In the separate research areas the topic is

mentioned 6 times or 10% in cross-sectional content, twice in field based budgeting research or 5% of the contents and twice in the theoretical area or 10%.

Budget participation is described as the extent to which individuals are involved with, and have influence on the process of budget determination (Brownell, 1982).

The effects of involving individuals in setting budget targets is the main motivation for devoting research to the topic. As mentioned prior the performance moderating effect of budgeting remains the most important reason to budget.

The results indicate that a higher degree of participation will result in a higher organizational commitment and higher performance. The statement is supported with several conclusions of researches performed by Fisher et al. (2002), Libby and Laurier (2001) and even in different cultural settings by Leach-Lopez et al. (2007).

Also the quality of budgets, which is higher accuracy and less variance between budget and actual performance, increases when participation increases (Poon and Tjosvold, 2009).

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Strategy formation and control

In total the contribution to the content for the topic strategy is 8% or 10 contents of the total contents of the target period.

Per research area it accounts for 3 of the 23 cross-sectional publications, or 5% of the total contents of the research area. In the theoretical research area strategy is 3 times part of the content and is 14% of the content and respectively 4 times and 10% of the applied contents. Strategy is researched in different settings in the target period.

The first author to pay attention to the topic in the target period publications was Hartmann (2000).

Hartmann (2000) performed a literature review on the degree of reliance on accounting performance measures (RAPM) organizations pursue to control their strategy. His findings state that current research often lacks empirical support for researches to the strategy-control relationship. Langfield-Smith came to the same conclusion and stated that the strategy-control relationship researches are limited.

Another strategy research setting is the relation between strategy and the budget control tightness. Hansen and Van der Stede (2001) conclude that there is a relation between the strategy type an organization enhances and the budget control they use. They found

evidence for a positive relation between the degree of diversification and slack in the budgets. Differentiation is associated with a more prospector strategy.

Van der Stede hereby follows the line of his prior research (Van der Stede, 2000). Here proof was found for the negative relation between budget slack and short term orientation. Short term orientation is associated with a more defender strategy, which leaves less room for differentiation or innovation.

Davilia and Wouters (2005) found proof supporting the conclusions of the researches by Hansen and Van der Stede (2001).

A study to the more secondary effects of strategic implementations is performed by

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MSC O&MC

4.2 Trend analysis

This paragraph provides evidence on the trend analysis following from the article content analysis. The results are visualized in bar tables for the subsequent periods. The second paragraph seeks to discover the reason for any shifts in trends within budgeting research.

Target period

Figure 1 visualizes the publication numbers for all the topics of the target period. The blue bars represent the first period and the red bars the second period.

Figure 1: Bar diagram for all topics divided by period

The number of total publications in the second period is much lower compared to the number from the first period. The first period accounts 29 publication on budgeting, where the second period only accounts for 18 publications.

This decline is seen in the distribution for most topics and represents the decline in total researches published on budgeting in the second period.

There is no direct clue for this decline for budgeting research publications, however a trend which shows from the data.

Although the total frequency of publications and topics declines in the second period, the percentages of publications which contain the performance topic remains constant. The same holds for the subjects slack, information, strategy ethics, structure and fairness. The

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Figure 2 shows the five most popular topics per period for the target period.

The fact that these top five mentioned topics do not decline as a percentage of the total publications in the second period, may be due to the fact that the focus of budgeting research in general is aimed at searching solutions for the setbacks of traditional budgeting (Hansen, Otley and Van der Stede, 2003).

Figure 2: Bar diagram for ‘top five’ topics

Researchers and practitioners identified that, among other variables, vertical command structures and centralized decision making hold back the potential of budgeting (Hansen, Otley, Van der Stede, 2003). By researching how performance for budgeting could by improved for all 4 reasons for budgeting identified by Hansen and Van der Stede (2004), researchers aim to tackle these setbacks. Slack reduction, information sharing, decentralizing both decision making and responsibilities in order to create a fair process for budget setting, seems fruitful for budgeting improvement.

In comparison to the five most published topics, the various dysfunctional consequences of budgeting gathered in the ‘dysfunctional’ topic, is also popular in the second period compared to many other topics.

The ‘dysfunctional topics’ (figure 1) are topics in which the negative effects of the use of budgets in researched. Examples are ‘cost-stickiness’ and ‘spend it or lose it’, which are negative effects of the use of budgets.

These dysfunctional associations of budgeting account for three publications in the second period and are not in the top five, however increased significantly in popularity. This may be due to the overall perception of tackling the major setbacks of budgeting.

Not in the top five of topics, however the results from figure 1 show an increase of absolute times mentioned on the variable of reputational influences related to budgeting topics slack and information asymmetry. The topics are reviewed by Brown et al. (2009) who state that the role of these ethical and reputational considerations in the process of budget participation and reduction of information asymmetry prove to be fruitful areas of research.

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23 4.3 Concluding remark

The five most popular topics in the target period for researchers to publish on were performance, budget slack, information, participation and strategy.

One explanation is that budgeting originated as performance moderator and is still used many times for that reason. Testing the topic in relation to other academic disciplines could suggest that the topic has matured. Researchers search in other academic disciplines for answers in their own discipline.

Participation follows the performance topic. Research to budget participation generally seeks to improve the performance reached by the use of budgeting. Participation is closely linked to increasing commitment to the budgets with the eventual goals of making budget more reliable and increase performance by this higher commitment.

Contributing to the reliability of budget setting is the reduction of budget slack. Slack is usually considered as being an unfavorable aspect of budget setting.

Less budget slack should result in more control however, recently some authors have stated that some amount of slack improves the long-term focus of managers in support of the strategy an organization pursues.

The reduction of information asymmetry and sharing of information can be led back to the four reason to budget, goals communication and operational planning (Hansen and Van der Stede, 2004). The different organizational levels possess knowledge of environmental circumstances an organization operates in. When information asymmetry is reduced, the organization is better and quicker able to adapt.

Strategy is mentioned frequently in relation to control. Strategy formation as a result of the information from the budgeting process or linking the right budgeting measures to the chosen strategy are the most common relations in the publications.

In retrospect there are a few topics which are prominently in place in the target period however, are not mentioned frequently enough to reach to top five of topics. The following relations attracted attention next to the common published topics from the trend analysis. Addressing the ethical and reputational considerations of individuals involved in the process of budget setting should reduce information asymmetry and improve information sharing to gain more accuracy in the budgets for the entire organization.

Additionally the decentralization and the empowerment of employees to increase motivation and job satisfaction are repetitive topics to improve budgeting. These topics are mentioned throughout the research areas, however seem to be more present in the cross sectional and field based researches.

From the trend analysis the field based research shows a focus on dysfunctional features of the budgeting process from zero times in the first period to 3 times in the second.

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5 Theory development

The second research objective is to identify newly developed budgeting theories in the target period.

Newly developed theories may sprout from new experimental forms, combined theories not researched before or new insights in relations between topics. The next paragraph will provide a summary of the budgeting theory development from the target period. It seeks to answer the question: Which of the published researches provided new insights?

Theories per topic

The results analyze the new insights in theory by the topics they address. Many of the new insights, or the researches that extend existing literature, are developed by means of experiments. The field based research area, three publications have provided new insights which are gained by means of case studies. The field based area along with the cross sectional area have contributed most to theory.

Performance

On the topic performance several new theories have emerged in the target period. Upton (2009) included a sociologic variable in his research by assessing social values of individuals and provides new theory with his experiment. The research focuses on Budget Based Contracts (BBC) performance under different social values of participants. The experiment setting is new because of the measurement of the Social Value Orientation before the experiment starts, by an entry questionnaire. SVO distinguishes different psychological constructs that measures the extent to which individuals are identified and concerned about their actions, values and effects of their actions. By performing this pre experiment test on the participants, Upton (2009) was able to use the social values of the participants and include them in his research by making specific ‘social value groups’. Upton (2009) provides evidence that BBC form should be considered in relation to the social values of the group it applies for. The results of his experiment shed a light in the difference in performance of particular social value groups under different BBC forms.

Fisher et al. (2003) also extended budgeting theory on the topic with their results when considering the budget form in relation to group performance. Three different group-based incentive contracts, or BBC were tested with group performance, the budget-linear contract, group piece rate and budget-fixed contract (Blinder 1990; Cohen and Bailey 1997). The research concluded that the budget-linear contract resulted in the highest performance for the group. With their research, Fisher et al., (2003) have provided support for new theory

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25 Slack

The theory on the topic budget slack is extended with some new insights on various variables. Stevens (2002) included psychological relations with budgeting in his research and provides evidence on ethical and reputational concerns of individuals which have the reduction of slack as a result. General agency theory predicts that solely economic incentives influence the motivation of individuals and the performance budgets they submit. The Stevens (2002) experiment however, provides evidence is provided motivations other then economic. His experiment tested the participants on their reputational considerations after the experiment. He found a negative relationship between the amount of reputational considerations a person possesses and the amount of slack a person submitted. Individuals do not want to get a reputation of submitting unreliable budget or, in case of budget based contracts, enrich themselves. However, economic considerations still seemed more important than reputational considerations for the majority of participants.

Very closely related to the slack topic is the topic of budget quality, or accuracy introduced by Edwards et al. (2005).

The quality of the budgets is a new phenomenon in the target period literature introduced by Edwards et al. (2005). The term accuracy however, relates closely to the slack reduction and information sharing theme. It describes in detail how a more accurate budget improves relations between individuals of interdependent tasks, due to the fact that the interdependent individuals can rely more on the submitted budgets.

Reliability of budgets in relation to reputation is also related to the topic of budget slack. Webb (2002) ads to literature by the inclusion of reliability of the budgets set by subordinates. In the results of his research Webb (2002) found that reputational concerns reduce the amount of budget slack. The experiment even found proof for a decrease in slack when only the probability exists of superiors investigating favorable budget variances. In line with the ethical considerations of Stevens, they found evidence for reputational and ethical considerations which contribute to existing agency theory.

Information sharing

Budget accountability is introduced by Goddard (2004) who did theory research on the aspect of accountability. The theme is new in the information sharing topic, since the effects of the quality of information or actions have not been researched yet. The results of the research address the level of individuals being responsible and can be hold responsible for the budget targets they have submitted. The research mentions accountability as the degree to which individuals or groups have rights to make demands over the conducts of another to take action (Goddard, 2004). The results improve literature because of the interpersonal aspect where individuals can hold others accountable for their progress. In the research Goddard (2004) mentions reciprocal tasks as a requirement for individuals holding each other

accountable for their budgets which finds support in later publications from the target period of Poon and Tjosvold (2009) and Frow et al.(2005; 2010). In the reciprocal task environment individuals depend on the accountability of the individual before him. If this individual fails, the whole chain fails. Accountability and holding other individuals accountable for their budgets eventually influences multiple individuals in this reciprocal environment. These statements are supported by Schatzberg and Stevens (2008), who state that individuals which are longer reciprocal connected eventually perform better.

Participation

The effects of budget participation has been researched in relation to performance in different settings. In short the results of the publications in the target period indicate that a higher degree of participation will result in a higher organizational commitment and higher

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6 Methodologies and respondents

This chapter provides insight in the third research objective. It seeks to answer the question: With which methodologies, research settings and data sources did the researchers get to their conclusions? Chapter 3.7 describes how the division of research methods is established. The following parts describe the methodologies and settings of the research areas separately.

6.1 Research areas

As chapter 3 already mentioned, the publications are divided by research characteristics. Figure 3 displays the distribution of the target period publications among the research areas.

Figure 3: Distribution research areas

The figure shows that cross sectional is the predominant research area, followed by the field based studies. Purely theoretical is the least popular area, with the same number of

publications as the separate.

The periodical distribution is elaborated on in the next section.

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MSC O&MC

6.2 Research methods

Cross sectional

The cross-sectional publications throughout the period are 20, from which 13 in period 1 and 7 in period 2.

Figure 4: Distribution of research methods per period for cross sectional

The research method experiments remains constant in both periods, where the survey gained in popularity. Empirical research and case studies are only executed in period 1.

Theoretical

The publications for the theoretical research area consist of publications which focus mainly on previous budgeting literature in a review, for 5 of the 6 publications, the other is a survey in a ‘for profit’ private owned company. One publications reviewed a pure theoretical aspect of budgeting and surveyed how it had implications in practice.

Figure 4: Distribution of research methods per period for theoretical

0 1 2 3 4 5

Empirical Case study Experiment Survey Questionnairre

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Field based

From the research area field based the research methods are distributed as 15 (multi)case studies and one business survey. 4 of the case studies provide empirical evidence on the theories researched.

Figure 5: Distribution of research methods per period for field based

Separate

The separate subjects consist of 6 publications.

The research methods for these subjects were 3 times an experimental setting. The other three are reviews of existing literature. The publication of Brown et al.(2009), reviews among others the three experiments of the same separate subjects. Again, the experiments prove to be contributive to existing literature on the knowledge of budget negotiations.

Figure 6: Distribution of research methods per period for separate

0 1 2 3 4 5 6 7

Empirical Case study Survey

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MSC O&MC

Target period

Over the whole period 47 publications are devoted to budgeting which are distributed in the research areas as follows; 20 for the cross-sectional research area, 6 for the theoretical area, 15 for the field based area and 6 separate subjects.

Figure 7 displays how the different research methods are distributed for all publications of the target period

Figure 7: distribution of research methods for total period target period

Over the entire period the most predominant research setting was the case study. 13 publications used a case study to gather data for their research, most of these case studies (10) in the field based research area.

The second most popular research method was the experimental setting. This was used 12 times, from which 9 in the cross-sectional research area. In this research area, 8 times is chosen for student testing.

The third was the literature review, where prior publications are assessed and compared, used in 8 of the publications. The majority of the theoretical researches is conducted (5) by means of a literature review.

0 2 4 6 8 10 12 14

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Periodic distribution

Figure 8 and 9 show the distribution of research methods for all publications per period. Strong increases or decreases will show from the figure. Figure 8 shows the absolute numbers of the research methods used. Figure 9 displays these numbers in pie charts from which the relative contributions of the research methods better show.

Figure 8: Distribution of research methods per period for target period

Period 1 Period 2

Figure 9: Relative distribution of research methods per period

As can be seen from the figures, the empirical research setting is a method which is more used in the second period then the first period. Figure 4 shows that the field based research area is responsible for this incline.

Second, the research by survey gained in popularity, which is a result of use in both the cross-sectional and the field based areas.

The researches by experiment however gained in popularity relatively. It was used frequently in the cross-sectional and separate publications.

0 1 2 3 4 5 6 7 8 9 10

Empirical Case study Experiment Survey Questionnairre Review

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The strongest decline shows for the questionnaire and review methods. Reviews are most

predominantly used in the theoretical approach and suffered a decline according to the decline in publications in this research area.

The questionnaire was only used in the cross-sectional area, which suffered a decline in publications as well and is responsible for the relative decline.

The case study did suffer a decline in relative numbers due to the absence of the research method in the cross-sectional area during the second period.

There is no clear pattern observable from one of the figures except for the incline and decline in some of the research methods. The decline in reviews may be explained by the overall decline in publications from the second period of the theoretical research area. The first period accounted for four reviews, while the second period only accounted for one. The incline for the empirical research is not easily explained. Some authors called for empirical evidence in budgeting research (Hartmann, 2000), however this call concerned other topics.

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6.3 ‘For profit’ vs. ‘Not for profit’ organizations

To create a full image of the research circumstances under which the publications are established, this section analyzes the organizational types from which the authors choose to retrieve their data.

In case of questionnaires, surveys, case or empirical studies researchers choose to gather data in organizations. The distribution of whether these were for profit organizations or not for profit is displayed in figure 9. This figure only represents the distribution researchers

performed in organizations because

Total distribution

Cross-sectional Field based

Figure 9: For profit vs Not for profit settings

In the cross sectional research area, the organizations used to distribute questionnaires were almost all (12) ‘for profit’ organizations and 1 ‘not for profit’ organization. From the for profit organizations only 1 was public owned.

From the field based research, the organizations surveyed, ten were in ‘not for profit’ settings in government, hospitals or educational bodies. Five of the case studies were executed in ‘for profit’ organizations. From the five ‘for profit’ research settings only one particular organization was targeted for specific research. The other for profit settings were studies of multiple cases and in one case a entire industry.

None of the ‘for profit’ organizations were used for empirical research.

Concluding remark

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33 7 Future research

The suggestions for future research are discussed in this section. Some of the researches from the target period have contributed to existing literature. Some of the theory building publications can further extend literature by adding new or extra variables to the budgeting research. The next section elaborates on the possibilities to extent experimental settings or research methods to find more evidence for theory development of support existing literature. The results are categorized by the topic they represent. The first part will elaborate on suggestions on how to extend current research settings. The second part mentions some suggestions for organizations which researchers could choose as research targets.

Extending research methods

Slack

Reputation and ethical concerns and work related values are introduced in the target period as variables affecting the inclusion of slack in the budgets and improvement of information sharing or reduction of information asymmetry.

In succession of these researches on ethical considerations and work related values, some possibilities exist to extend existing literature by adapting the research settings.

Stevens (2002) who regard budgeting as an operational planning tool extended theory with their research setting. Their research setting could be extended further by empirical research on the topic.

Reputational and ethical concerns are linked to economic compensation and the loss of reputation and ethical judgment deterioration could affect their economic gain. Empirical and theoretical research is needed regarding how the reputational/ethical concerns trade-off with these economic considerations. This future research recommendation is in line with the Schatzberg and Stevens (2008) recommendations. They suggest that the area on ethical considerations will provide a fertile research area since there is not much literature on the relation between ethical and economic incentives for individuals.

A suggested research setting is a survey in large organizations among managers who submit budgets to their peers. Their valuation towards ethical and reputational concerns should be measured before the survey, similar to the experiment performed by Upton (2009). Then the different levels of budget slack on the submitted budgets can be measured and regressed between the different ethical valuations of the individuals.

In line with the new theory by Webb (2002) on the relation between reputational concerns and the amount of slack submitted in the budgets, some additional new questions should be asked on the subject. The first question that rises is what the difference will be between mangers with established reputations and the managers trying to build their reputation in relation to their slack creation. Here a survey where coworkers of the participating managers are questioned on the participant’s reputation would be in place, before the different budgets are compared.

On the contrary Davila and Wouters (2005) suggest that future research should focus on how organizations design budget systems that allow for some slack. The design of such a budget control tool should provide in a system in which some cost targets are eased when it is difficult to meet al cost targets simultaneously. However, the research setting should simulate a turbulent environment. The Davila and Wouters (2005) theory is that the allowance of slack should occur in more prospector organizations, which usually operate in turbulent

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Budget control

The social values extend to other relations in practice. Subramaniam and Mia Lokman (2001) created understanding in the social aspect of Value Orientation toward Innovation and how this relates to performance under particular budget control systems. The research stated that there is a positive relation between an individual’s openness to innovate and a loose type of budget control to fit this type of individual.

Future research on the values could concentrate on the same relation as the work by Subramaniam and Mia Lokman (2001), the relation between social values and control tightness, however could be stretched to other relations or other social values.

This gives opportunities for further research on work related values other than value towards innovation, e.g. work related values toward team- orientation, and aggressiveness (O’Reilly et al. 1991).

(Group) Performance

In accordance with the Value Orientations, Rankin, Schwartz and Young (2008) state that assessing current employees on their Social Value Orientation could lead to reassignment within the organization or the type of Budget Based Contracts individuals operate under. They even state that individuals may choose the organization they wish to be employed in according to the contract forms which best apply to their Social Value Orientation. When this self-selection occurs in practice, the question rises whether this affects organizational performance.

Combining the relation between Social Values Orientation and performance under BBC is a research possibility for the next decade. Fisher, Peffer, Sprinkle (2003) performed an experiment on BBC form in relation to group performance. The experiment did not allow for interaction between the group members. The effects of interaction between group members in the experiment to research how communication and formal mutual monitoring mechanisms affect this group performance can be a fruitful extension of the current setting.

To create greater understanding of the relation between Social Values and group

performance under different Budget Based Contract forms Sprinkle, Williamson and Upton (2008) suggest a research setting with a multi person setting in multi-year period empirical research on Budget Based Contracts. The multi-year setting should provide individuals a learning capability to maximize compensation and allow for increasing reciprocity (Goddard, 2004).

For all suggested researches using Social Value Orientations, ethical and reputational considerations as a variable, the values should be tested before the experiment or survey commences. By pre-experiment testing the setting provides evidence for the behaviors of the differently oriented individuals.

A decade of Budgeting Research -Developments and trends in budgeting research in the new millennium-

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