JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH

Vol. 24
2012
pp. 159175

American Accounting Association

DOI: 10.2308/jmar-50202

The Mediating Effect of Psychological Capital

on the Budget Participation-Job Performance
Relationship
Roopa Venkatesh
Jennifer Blaskovich
University of Nebraska at Omaha
ABSTRACT: This study draws from the literature in positive psychology and
organizational behavior to examine the role of an individuals psychological capital
(PsyCap) on the budget participation-job performance relationship. PsyCap is an
emerging construct that represents an individuals positive state of psychological
development, and is characterized by the individuals hope, efficacy, optimism, and
resiliency. We surveyed 109 employees working in organizations across the United
States who are actively involved in the budget-setting process or have budgetary
responsibilities. The results of a mediation analysis show that budget participation is
significantly and positively associated with employees levels of PsyCap, which is in turn
significantly and positively associated with higher levels of job performance. Supplemental analysis using a structural equation modeling technique also supported the
hypotheses of this study.
Keywords: budget participation; positive psychology; psychological capital; PsyCap.

INTRODUCTION

rganizations allow employees to participate in the budget-setting process expecting, but

not always achieving, positive outcomes such as a greater level of job performance or job
satisfaction (Argyris 1952; Becker and Green 1962; Chenhall and Brownell 1988; Kren
1992; Douglas and Wier 2000; Covaleski et al. 2003; Marginson and Ogden 2005; Sheely and
Brown 2007). However, the extant literature in managerial accounting has failed to establish a
direct relationship between budget participation and job performance, reporting positive, negative,
and insignificant results (Murray 1990). Researchers have nevertheless maintained the notion that
involving employees in the budget-setting process should positively influence their performance
(Argyris 1952; Murray 1990; Chong and Chong 2002), and have attributed the inconsistent
empirical results to inadequacies in the theoretical framework(s) adopted by prior research (Ronen
and Livingstone 1975; Ferris 1977; Brownell and McInnes 1986; Kren and Liao 1988; Murray
1990; Chong and Chong 2002; Covaleski et al. 2003).
We are grateful for the Institute of Management Accountant (IMA) Foundation for Applied Research (FAR) grant for
support with the data collection.

Published Online: May 2012

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Consequently, psychology-based researchers have proposed an intervening-variables model,

which suggests that individuals mental states intervene between budgeting and performance
(Covaleski et al. 2003). Studies following this path examine motivational factors that mediate the
participationperformance relationship (Nouri and Parker 1998; Shields et al. 2000; Covaleski et al.
2003; Sheely and Brown 2007). To add to this literature, we draw from theory and research in
positive psychology to examine the role of a psychological variable with a motivational propensity
that has not yet been introduced in a budget participation context, called psychological capital
(PsyCap) (Luthans et al. 2007b). We investigate whether budget participation strengthens
employees positive mental states, and whether such strengthened positive mental states result in
enhanced job performance. We capture employees positive mental states through their levels of
PsyCap, and propose that it plays a mediating role in the participationperformance relationship.
PsyCap is defined as an individuals positive state of psychological development that is
characterized by (1) having confidence (efficacy) to take on and succeed at challenging tasks; (2)
making a positive attribution (optimism) about succeeding now and in the future; (3) persevering
toward goals, and when necessary, redirecting paths to goals (hope) in order to succeed; and (4)
when beset by problems and adversity, sustaining and bouncing back and even beyond (resiliency)
to attain success (Luthans et al. 2007b, 3). PsyCap focuses on developing and building on
individuals strengths instead of concentrating on reducing or eliminating individuals weaknesses.
The study of PsyCap is gaining prominence in the organization sciences, and research in
organizational behavior provides evidence that PsyCap is a core construct that predicts performance
better than any one of the individual strengths that make it up (Luthans et al. 2008; Gooty et al.
2009). We hypothesize that higher levels of budget participation are associated with higher levels of
PsyCap and higher levels of PsyCap are associated with higher levels of job performance.
We surveyed 109 employees or managers working in organizations across the United States who
are actively involved in the budget-setting process or have budgetary responsibilities. The results
show that budget participation is significantly and positively associated with employees levels of
PsyCap, which in turn is positively associated with higher levels of job performance. The same results
were found when a structural equation modeling technique was used as supplementary analysis.
Our work contributes to the literature in budgeting and budget participation. We identify a
mental state associated with positive outcomes, PsyCap, and provide initial empirical evidence on
its role as a mediating link between budget participation and performance. This supports the
intervening-variables literature, which assumes that budgeting influences mental states and,
consequently, behavior. On a broader scale, we add to the growing literature on positive psychology
in the workplace. Although such research has established a relationship between positivity and
outcomes (e.g., Bandura 2008), ours is the first to suggest PsyCap as a theoretical mechanism
relating positivity to budgeting and performance. This addresses calls for research to examine the
positive aspects of budgeting and the potential for budgets to play a more functional role in
individuals work-related experiences (e.g., Marginson and Ogden 2005). Finally, we answer
scholarly calls for research using alternate theories to examine the motivational effects of budget
participation (e.g., Chong and Chong 2002).
The results reported herein also have the potential to inform practitioners about improving
business performance. The contemporary workplace is experiencing changes at a more dramatic
pace than ever before (Larson and Luthans 2006). In such an environment, we expect the results to
inform managers about the extent to which budget participation has the potential to build
employees strengths to perform successfully at challenging tasks, instead of focusing on the
dysfunctional behaviors associated with budget participation.
This paper is organized as follows. The next section discusses the prior literature and
theoretical foundation for our research hypotheses, followed by the research method and results.
The paper concludes with a discussion of the results and opportunities for future research.
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HYPOTHESES DEVELOPMENT
Psychology-based research in budgeting has focused on the effect of practices such as
participation on employees mental states, their behavior, and performance (Covaleski et al. 2003).
Consistent with prior research, we define budget participation as a process in which an employee is
involved with, and has influence on, the determination of his/her budget (Shields and Shields 1998;
Chong and Chong 2002). Ideally, participation should motivate employees to improve their job
performance (Argyris 1952). Although substantial effort has been devoted to studying the
motivational role of budget participation on job performance, the effect has been shown to be
positive, negative, and insignificant (see Shields and Shields [1998] for a review). In an attempt to
explain the inconsistencies, researchers have proposed and developed an intervening-variables
model, which presumes that individuals mental states mediate the relationship between
participation and performance (Covaleski et al. 2003). Studies in this vein have found support
for several intervening variables, including stress (Shields et al. 2000), resource adequacy and
organizational commitment (Nouri and Parker 1998), and goal commitment and fairness
perceptions (Wentzel 2002). These variables, however, focus on alleviating employees negative
mental states during the budget participation process. Although these factors remain important,
researchers in the positive psychology movement suggest a need for a more balanced focus
(Luthans et al. 2008).
The positive psychology movement is centered on the positive qualities in individualstheir
strengths, wellness, and prosperity (Seligman 1998). A growing body of work in this area
demonstrates that people flourish when we focus on what is right with them, rather than on fixing
what is wrong (e.g., Nelson and Cooper 2007; Wright 2003; Fredrickson 1998, 2000). Positive
psychology in the workplace is termed positive organizational behavior (POB). POB is the study
and application of positive-oriented human resource strengths and psychological capacities that can
be measured, developed, and effectively managed for performance improvement (Luthans 2002b,
59). PsyCap, derived from POB, is a state-like, higher-order construct made up of four dimensions
that underlie an individuals mental state: hope, efficacy, resiliency, and optimism (Luthans et al.
2008). A fair amount of research in POB has examined the role of PsyCap in organizational
contexts, and has found PsyCap to have a significant positive influence on employees job
performance, job satisfaction, and organizational citizenship behaviors, when supportive
organizational contexts exist (e.g., see Luthans et al. 2008; Avey et al. 2009).
Psychological Capital and Budget Participation
The literature in positive psychology (Snyder 2000, 2002) and POB (Luthans et al. 2007a)
clearly differentiates the four individual dimensions that comprise PsyCap, and provides evidence
for the discriminant validity among them. Moreover, since PsyCap is considered a state-like
construct and is open to development (e.g., Luthans and Youssef 2007; Avey et al. 2009; Bandura
1997; Snyder 2002; Masten and Reed 2002; Carver and Scheier 2002; Seligman 1998), budget
participation is conducive to developing and increasing an employees level of PsyCap. Unlike
traits, which are generally stable individual differences, state-like constructs capture changes based
upon situational or contextual factors such as budget participation.
Self-Efficacy
Self-efficacy is defined as ones confidence in his/her ability to accomplish a task (Luthans et
al. 2008). The most effective approach to developing employees self-efficacy is to allow them to
experience success, or mastery experiences (Bandura 1997). In order for employees to
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Venkatesh and Blaskovich

experience this, they need to work toward self-set, challenging but achievable, specific goals
(Luthans and Youssef 2004).
While participating in the budget-setting process, individuals will have influence over setting
challenging but achievable, specific goals. Budget participation is conducive for individuals to
interact with their superiors at work and experience task mastery, and engage in social persuasion
and feedback, which are important sources of efficacy from Banduras (1997) widely accepted
taxonomy. Participation allows individuals the opportunity to receive encouragement from their
supervisors as they work toward their self-set budgets, which can build their confidence to perform
successfully and achieve their budgets. Thus, we expect that higher levels of budget participation
will be associated with higher levels of self-efficacy.
Hope
Hope is a context-specific, motivational state based on the interaction between three factors:
goals, willpower (agency), and waypower (pathways) (Snyder et al. 1996; Snyder 2000, 2002;
Luthans and Youssef 2004). Agency is the motivation (the will) to accomplish a task, and the
pathway is the means (the way) to do so. The agency and pathways dimensions interact in an
iterative manner to generate and enrich hope in an individual. The pathways or waypower
dimension of hope distinguishes it from the other three PsyCap dimensions (Luthans and Jensen
2002; Luthans et al. 2004a; Luthans et al. 2004b; Luthans and Youssef 2004; Luthans et al. 2007b;
Avey et al. 2009). It signifies ones motivation to put in the effort to generate workable routes to
attain desired goals. Although there are conceptual similarities between hope and self-efficacy, selfefficacy represents ones confidence in his/her abilities to take on a task, while hope represents
ones motivation to put in the effort and plan the path to success (Luthans et al. 2008; Avey et al.
2009).
Initiatives such as budget participation are necessary for developing an individuals level of
hope, because they allow an individual to view him/herself as being in control of his/her own and
the organizations present and future. Participatory work environments that allow employees to set
goals and create targets toward which they can direct their agency (willpower) and pathways
(waypower) have been effective in nurturing and developing employees levels of hope (Luthans
and Youssef 2004). Therefore, employees or managers who actively participate in the budgetsetting process should have higher levels of hope, allowing them to remain committed to attaining
their goals and planning the pathways to do so.
Optimism
Optimism draws from attribution theory and is an individuals style of explaining good or bad
events (Luthans et al. 2008; Gooty et al. 2009). Specifically, optimists interpret bad events as being
only temporary and pessimists interpret bad events as being permanent (Luthans and Youssef
2004). In the workplace, employees levels of optimism can be developed when managers and
employees accept their past failures and setbacks, and forgive themselves for mistakes that they can
no longer reverse. Organizations that use approaches that encourage employees to have an
appreciation for the present, including both the things that they can control and those they cannot,
provide a conducive work environment for developing employees levels of optimism. Further,
employees levels of optimism can also be developed when they are encouraged to view
uncertainties in the future as opportunities for growth and advancement, and embrace them with a
positive attitude (Luthans and Youssef 2004).
Budget participation is a practice characterized by interpersonal relations between the
supervisor and the employee. Supervisors are in a position to influence employees favorable
assessments of good or bad events. Organizations employ budget participation to provide an
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optimistic and encouraging work environment for their employees (Argyris 1952; Covaleski et al.
2003). Therefore, the budget participation process is conducive to developing employees optimism
in the workplace, and we expect that higher levels of budget participation should be associated with
higher levels of optimism.
Resiliency
Drawing from the work of positive psychologist Ann Masten, PsyCap resilience is defined as
the developable capacity to rebound or bounce back from adversity, conflict, failure, or even
positive events, progress, and increased responsibility (Luthans 2002a, 702). Resiliency is
activated by an antecedent stressor, which can be either positive or negative, and encompasses the
adaptation processes that employees use in situations of uncertainty or risk.
Organizations can develop employees resiliency with the use of asset-focused strategies, such
as emphasizing and enhancing resources that increase the probability of positive outcomes despite
the presence of risks (Luthans and Youssef 2004; Luthans et al. 2007a). OSullivan (2010)
recounts how budget participation practices at several organizations focused employees mindsets
on positive outcomes during the depths of the recent recession. Despite fears of layoffs or
bankruptcy, participation motivated their efforts toward a successful result. Further, Peterson et al.
(2011) suggest that supervisors can build resiliency by providing a mechanism for subordinates to
make decisions regarding their performance. Budget participation is an example of such a
mechanism, and accordingly we expect that it facilitates the development of employees levels of
resilience.
In sum, we propose that budget participation will provide a positive psychological context for
employees to set challenging but achievable goals, a belief in accomplishing them and overcoming
adversity, and a belief in a positive future. Budget participation is a contextual condition that is
conducive for creating the positive conditions necessary to increase employees levels of PsyCap.
PsyCap as a Core Construct
As noted by Avey et al. (2009, 9), although the four constituents of PsyCap share a common
capacity of internalized agency, motivation, perseverance, and success expectancies, the extent of
workplace influences, and the adaptational mechanisms and goal achievement processes, vary
across the four capacities, making each capacitys contribution unique to the multidimensionality of
PsyCap. For instance, the waypower dimension of hope enables an efficacious person to build the
propensity to develop alternative pathways to accomplish self-set goals. Thus, hope can add
substance or more pathways to consider, for the internalized motivation, perseverance, and positive
expectancies of efficacious individuals, and enhance their levels of self-efficacy.
PsyCap self-efficacy and hope share positive expectancies about the future which are related to
a specific goal and are internalized and attributed to ones effort and motivation (Avey et al. 2009).
Although optimism shares positive expectancies about the future with self-efficacy and hope, it is
unique in that it may incorporate all aspects of a situation, while efficacy and hope tend to be related
to a specific goal. For example, in a work environment such as a budget participation context,
managers will have the opportunity to influence employees favorable assessments of good or bad
events, and could potentially influence them to externalize negative events and attribute them to
situational factors. Such an optimistic explanatory style of externalizing negative events should
alleviate any negative impact bad events could have on self-efficacy and hope that have already
been developed during budget participation. Resilience and efficacy share an underlying
perseverance component that encourages individuals to work toward their goals in the face of
obstacles. Resilient individuals are able to adapt even to situations characterized by obstacles
because they have the ability to draw on the appropriate assets (e.g., cognitive skills, social,
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financial, affective, and other resources) to overcome obstacles. The effectiveness of such
adaptational processes is vital to resilience in the same manner that the process of generating
alternate pathways is essential for the existence and enhancement of hope.
The PsyCap constituents of hope, optimism, and resilience therefore have the potential to
enhance a persons level of self-efficacy to succeed at a specific task. Efficacy, a key component of
PsyCap, has been widely examined by researchers in psychology and organizational behavior.
Stajkovic and Luthans (1998) conducted a meta-analysis of 114 studies and examined the
relationship between self-efficacy and workplace performance. The results of their study indicate a
significant weighted mean correlation of 0.38 between self-efficacy and workplace performance,
indicating that efficacy is an important factor in improving job performance. Thus, the combined
influence of the internalized agency, motivation, perseverance, and success expectancies
contributed by each of the four PsyCap constituents have the potential to enhance an employees
level of job performance to a greater extent than each of them would individually.
Several studies in the organizational behavior literature (Luthans et al. 2005; Larson and
Luthans 2006; Luthans et al. 2007a; Luthans et al. 2008; Gooty et al. 2009; Luthans and Avolio
2009) have found PsyCap as a core construct to be significantly and positively related to job
performance. More importantly, recent research in organizational behavior has found that PsyCap
was best measured as a core construct, where each of the four dimensions load onto the overall
PsyCap core construct. This research has demonstrated that PsyCap consists of the shared variance
of efficacy, hope, optimism, and resilience, and that PsyCap as a core construct was more
consistently related to performance than each of the four dimensions individually (Luthans et al.
2007a; Avey et al. 2009). There is also evidence to support the expectation that PsyCap represents
an intervening variable in an organizational practiceperformance context. Luthans et al. (2008)
examined the influence of PsyCap on the relationship between supportive organizational climate
and performance, and found evidence that PsyCap fully mediates this relationship. We propose an
indirect effect of participation on performance through PsyCap. Thus, the following hypotheses,
stated in the alternative form, are tested:
H1a: Higher levels of budget participation are associated with higher levels of individual
PsyCap.
H1b: Higher levels of individual PsyCap are associated with higher levels of individual job
performance.
Figure 1 represents the theoretical model of the study.
FIGURE 1
Theoretical Model

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RESEARCH METHOD
Participants
Employees at different levels, from chief financial officer to accounts payable clerks, are
involved in or participate in the budget-setting process to some extent (Sheely and Brown 2007).
Therefore, we invited employees or managerswho currently occupy low-, mid-, or upper-level
positions; have held these positions for at least two years; and have budgetary responsibilitiesto
participate. An online survey gathered data regarding individuals: (1) budget participation, (2) job
performance, (3) PsyCap, and (4) demographic data.
The survey was sent to 2,500 employees working in a variety of industries in the United States
with the main criteria being that individuals be involved in the budgeting process. The Institute of
Management Accountants distributed an invitation to participate in the survey to its regular U.S.
members, excluding academics, students, and consultants. Of the 133 individuals who began the
survey, we received 109 completed, usable responses. This response rate (5 percent) is likely due to
the fact that practicing employees comprise the participant pool (high opportunity costs) and the
general decline in survey response rates over the last decade (Sax et al. 2003; Gassen and
Schwedler 2010). However, the absolute number of responses and the ability to survey practicing
employees provides meaningful evidence on the participationperformance relationship. Participants average age was 40.47 years (s.d. 14.04), and average tenure in their current positions was
just over four years (s.d. 4.23). Additional demographic information is presented in Table 1.
Measures
Job Performance (Dependent Variable)
We used a self-rated measure of performance (Mahoney et al. 1965) that has been used
effectively in prior budget participation research (e.g., Brownell and McInnes 1986; Govindarajan
1986; Kren 1992). Individuals were asked to rate themselves on eight dimensions of performance:
planning, investigating, coordinating, evaluating, supervising, staffing, negotiating, and representing. Following Kren (1992), an overall measure of performance was also included. The eight subscale items were summed up and averaged to construct a composite performance scale. The
combined scale was significantly correlated (r 0.682; p , 0.01) with the overall performance
rating. Following Kren (1992), this provides support for the combined scale as a reasonable
measure of job performance, and thus we use the combined scale in our statistical testing.1
Psychological Capital
The PsyCap questionnaire (PCQ) (Luthans et al. 2007b) we used has been found both reliable
and predictive of performance across diverse samples (Luthans et al. 2008). The PCQ is drawn from
four standard measures: (1) hope (Snyder et al. 1996); (2) resiliency (Wagnild and Young 1993);
(3) optimism (Scheier and Carver 1985); and (4) self-efficacy (Parker 1998). Each of the original
standardized scales has considerable psychometric support, and has been used in previous
workplace studies alone (Peterson and Luthans 2003) and in combination (Luthans et al. 2005;
Luthans et al. 2007a; Luthans et al. 2008). After reverse-scoring responses to the appropriate
questions, responses to each of the four subscales were summed and averaged to determine a
subscale composite. Then, the averages for each of the four subscales were added together and
averaged to get a composite average for each participants PsyCap score.
1

Participants responses of not applicable on this instrument were not included in the analysis.

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TABLE 1
Demographic Statistics
Panel A: Personal Information, Education, and Work Experience
n

Mean

Age
Years in current position, firm
Years in similar position, all firms
Years involved in budgeting
Gender

109
102
94
100
103

40.47
4.25
9.19
5.55

Highest degree attained

103

Type of degree

103

Standard Deviation
14.04
4.23
8.50
5.51
Female 39%
Male 60%
Bachelors 39%
Masters 61%
Business 97%
Other 3%

Range
2462
124
035
130

years
years
years
years

Panel B: Percentage of Participants from Different Industries

Industries

Percentage

Manufacturing
Governmental/Not-for-Profit
Accounting
Utilities/Mining/Energy
Other Service
Technology
Financial Services/Banking
Retail/Distribution
Construction/Transportation
Consulting
Health Care
Education
Other/No Response

24
13
10
9
9
8
7
6
5
5
5
3
5

22%
12%
9%
8%
8%
7%
6%
6%
4%
5%
5%
3%
5%

Budget Participation
A three-item version of a participation measure employed by Milani (1975) and used
effectively in prior budgeting research (Kren 1992) was used. We calculated an overall measure of
budget participation by averaging the responses to the three individual items.
ANALYSIS AND RESULTS
Given that PsyCap is a relatively new construct not yet addressed in the accounting literature,
we strictly follow the lead of Luthans and his colleagues (e.g., Luthans et al. 2008) for our statistical
analysis. Table 2 presents the means and standard deviations, and Table 3 shows the correlations of
the variables. The results in Table 3 show that Participation is positively related to PsyCap (r
0.520; p , 0.01), Participation is positively related to Performance (r 0.360; p , 0.01), and
PsyCap is positively related to Performance (r 0.449; p , 0.01). The results most importantly
show that PsyCap has a significantly positive role in the participationperformance relationship and
support H1a and H1b.
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TABLE 2
Descriptive Statistics
n 109

Variable
Performance
Overall Performance
Budget Participation
PsyCap

Mean
(Median)

Standard
Deviation

5.396
(6.00)
5.752
(5.43)
4.969
(5.33)
4.834
(4.79)

0.924

Actual
[Theoretical]
Range
3.147.00
[1.007.00]
1.007.00
[1.007.00]
1.007.00
[1.007.00]
2.675.75
[1.006.00]

1.179
1.704
0.577

Following Baron and Kennys (1986) technique, we estimated three regression equations to
test the hypotheses. In the first equation the dependent variable (Performance) was regressed on the
independent variable (Participation). In the second equation, the mediating variable (PsyCap) was
regressed on the independent variable (Participation). In the third equation, the dependent variable
(Performance) was regressed on both the independent variable (Participation) and the mediating
variable (PsyCap).
According to Baron and Kenny (1986), there is support for mediation if a significant
relationship is found for the first two equations, if the third regression shows that the mediating
variable is related to the dependent variable, and if the relationship of the independent variable with
the dependent variable is lower in magnitude than in the second equation. Further, in order to find
support for full mediation, the independent variable (Participation) should not relate to the
dependent variable (Performance) when the mediating variable (PsyCap) is added to the equation.
Table 4 shows the regression results for the tests of mediation with bootstrap standard errors.
The results in Table 4 show that the regression coefficient for Participation is significant when
Performance is regressed on Participation in Equation (1) (b 0.360, p 0.000). The regression
coefficient for Participation is significant when PsyCap is regressed on Participation (b 0.520, p
0.000) in Equation (2). Further, when Performance is regressed on both PsyCap and Participation,
PsyCap is the only variable that contributes significantly to the equation (for PsyCap, b 0.358, p
0.001). More importantly, the relationship between Participation and Performance becomes

TABLE 3
Correlation Matrix for Variables
Variables
Performance
Overall Performance
Budget Participation
PsyCap

Performance

Overall
Performance

Budget
Participation

PsyCap

1
0.682**
0.360**
0.449**

1
0.246**
0.344**

1
0.520**

** Correlation is significant at the 0.01 level (two-tailed test).

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TABLE 4
Tests for Mediation EffectRegression Results

Equation (1)
Budget Participation
Equation (2)
Budget Participation
Equation (3)
Budget Participation
PsyCap

Standardized
Coefficient b

t-statistic

Bootstrap
Standard
Error

0.360

3.988*

0.047

0.520

6.304*

0.036

0.173
0.358

1.728
3.575*

0.053
0.186

* Significant at p , 0.05.
For Equation (1): R2 0.129, Dependent Variable Performance, F 15.905. Sig. 0.000.
For Equation (2): R2 0.271, Dependent Variable PsyCap, F 39.741, Sig. 0.000.
For Equation (3): R2 0.223, Dependent Variable Performance, F 15.218, Sig. 0.000.

statistically insignificant when PsyCap is added to the equation (b 0.173, p 0.087), showing
support for full mediation. Figure 2 shows the results for the mediating effect of PsyCap. Thus,
there is strong support for H1a and H1b.2
Supplemental Analysis: Structural Equation Modeling
We also conducted a latent variable Structural Equation Modeling (SEM) technique to test the
hypothesized linkages of the theoretical model in this study. The SEM technique allows us to
simultaneously test the linkages in the structural model, and takes into account measurement error.
First, the measurement model was evaluated by confirmatory factor analysis. The measurement
model assessed whether all items in a given scale represented the same latent factor. A value greater
than 0.90 for the comparative fit index (CFI) and a value less than 0.10 for the standardized root
mean square residual (SRMR) are generally considered favorable and indicate reasonably good fit
(Hu and Bentler 1999; Kline 2005).
Our measurement model consists of two factors, Participation and PsyCap. The CFA revealed a
good fit (SRMR 0.063 and CFI 0.944). Item loadings for the three-item budget participation
scale ranged from 0.875 to 0.880 and were significant. Each of the four dimensions of PsyCap
significantly loaded on the overall PsyCap factor as follows: efficacy 0.679, hope 0.898,
optimism 0.709, and resilience 0.797.
We analyzed the structural model and relied on the standardized estimates with bootstrap
standard errors. The results are presented in Table 5 and Figure 3. Consistent with our expectations,
the standardized estimate between Participation and PsyCap is positive and statistically significant
(estimate 0.545, p , 0.05). Thus, H1a, which states that higher levels of budget participation are
associated with higher levels of individual PsyCap, is supported. Furthermore, the standardized
estimate between individual PsyCap and Performance was positive and statistically significant
2

We reanalyzed our results controlling for respondent characteristics, including industry, tenure in current position,
tenure in similar positions, age, and gender. We also performed a median split on Budget Participation to
determine if respondents levels of budgetary responsibility or authority is driving the findings. Results were not
significant. We thank an anonymous reviewer for these suggestions.

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FIGURE 2
Results of Tests of Mediation

* Significant at p , 0.05.

(estimate 0.345, p , 0.05). Thus, H1b, higher levels of individual PsyCap are associated with
higher levels of individual job performance, is supported. The overall indirect effect of Participation
on Performance through PsyCap is positive and statistically significant (estimate 0.188, p ,
0.05), suggesting that PsyCap plays a mediating role in the participationperformance relationship.
The standardized estimates between Participation and each of the PsyCap dimensions are also
positive and statistically significant as shown in Table 5 and Figure 3. We conducted a statistical
power test to determine the appropriate sample size based on the procedures by Muthen and
Muthen (2002). The results show that our sample size is appropriate, as a statistical power of 0.818
was obtained.3
DISCUSSION AND CONCLUSIONS
This study aims to provide empirical evidence about the relationship between budget
participation, PsyCap, and job performance. As predicted, our findings indicate that budget
participation is positively associated with PsyCap and that PsyCap is positively associated with
performance. We also find support for the indirect effect of budget participation on job performance
through PsyCap. Further, we use a structural equation modeling technique as supplemental analysis
and find additional support for our hypotheses.
Our study adds evidence to the recent stream of budgeting literature that employs an
intervening-variables model to explain the unexpected and inconsistent results of prior research on
the motivational effects of budget participation. Rather than assuming a direct or interactive effect
of budgeting and behavior, this approach assumes that budgeting influences mental states, which in
turn influence behavior (Covaleski et al. 2003). Different mental states have different effects on
behavior, resulting in a positive association between budgeting and performance in some cases and
a negative one in others. The goal is to identify the mental states associated with positive outcomes
and design organizational practices to develop them. Our study contributes to this literature by
3

To address the possibility that PsyCap acts as a moderator rather than a mediator, we followed the
recommendations of Baron and Kenny (1986) and Frazier et al. (2004) for the continuous variable case. We
performed a hierarchical regression analysis in which the predictor is entered in the first block, and the interaction
product of the predictor and possible moderator are entered in the second block of the regression model. The
interaction term was not significant, indicating that an existing level of PsyCap does not explain the variation in
participationperformance relationship. We thank an anonymous reviewer for this suggestion.

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170

TABLE 5
Results of Structural Equation Modeling (SEM)
Theoretical Model of the Indirect Effect of Budget Participation on Performance through
PsyCap

Influence of Effects
Budget ParticipationPsyCap
Effect of Budget Participation on:
Self-Efficacy
Hope
Resilience
Optimism
Effect of PsyCap on Performance
Indirect Effect of Budget Participation
on Performance through PsyCap

Estimate

Bootstrap
Standard
Error

Estimate/
Standard
Error

p-value

0.545

0.080

6.825

0.000

0.370
0.490
0.435
0.387
0.345
0.188

0.068
0.074
0.071
0.068
0.109
0.067

5.418
6.597
6.145
5.691
3.148
2.790

0.000
0.000
0.000
0.000
0.000
0.005

identifying a mental state associated with positive outcomes, PsyCap, and providing initial
empirical evidence on its role as a mediating link between budget participation and performance.
Beyond this contribution, our study introduces a psychological variable rooted in positive
psychology and POB to test the motivational effects of budget participation. PsyCap is an
outgrowth of the positive psychology movement, which focuses on the development of individuals
strengths rather than their dysfunctions. This is in contrast to much of the prior budget participation
research, which has focused on the negative consequences of participation (e.g., slack, gaming).

FIGURE 3
Results of Structural Equation Modeling (SEM)
Theoretical Model of the Indirect Effect of Budget Participation on Performance through
PsyCap

* Significant at p , 0.05.
Effect of BP on Performance through PsyCap is 0.188 and is significant at p , 0.05.

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171

Although these aspects remain important, the study of positivity in workplace contexts intends to
shift the focus to a more balanced understanding of what is also right with people, and how it can be
developed (Luthans et al. 2008). Our study suggests PsyCap as a theoretical mechanism relating
positivity to budgeting and performance.
We acknowledge several limitations of this study. First, PsyCap is an emerging construct that
remains open to refinement. The positive psychological constructs of hope, resiliency, optimism,
and self-efficacy have been theoretically and empirically validated to meet the criteria of the core,
higher-order construct. It is possible that other constructs may be included in the future. Second, we
rely solely on the psychology-based literature on budgeting to motivate our study, despite
Covaleski et al.s (2003) call for the use of integrated theories in budgeting research. Due to the
emerging nature of PsyCap and its roots in positive psychology, it is unclear how the construct may
relate to economic and sociologic theories of budgeting. Future research may investigate the
potential integrations of PsyCap with economic and sociologic variables. Relatedly, it is impossible
to capture all individual and contextual variables in one study. The measures are drawn from
well-established prior literature, but caution should be used in generalizing the results to all
participation contexts. Third, the response rate (5 percent in total, 4.5 percent useable) is low.
However, the access to practicing employees and the absolute number of responses provides valid
data with which to analyze our hypotheses, while setting the stage for more complex studies.
Fourth, the use of a self-rating of job performance may result in a leniency error or upward personal
bias. Although we followed prior research in our measure, this will reduce the objectivity of the
data. Perceptual measures, such as PsyCap and self-reported job performance, must be viewed
cautiously. It is reasonable to expect that when PsyCap is high, perception of job performance may
also be high. Future studies that include direct superiors ratings for subordinates performance will
minimize the bias. Additionally, experimental research and field studies may allow us to capture
richer data and ensure greater external validity.
Despite these limitations, the present study offers several implications for researchers and
managers. We provide initial evidence in an accounting context of an emerging construct that is
garnering a great deal of attention in organizational behavior, leadership, and management
disciplines. Additionally, we demonstrate a positive consequence of budgetary participation to
counter the negative behavior documented in some prior research. Given that PsyCap represents a
relatively new development, it is a fertile area for research. For managers, we document a
mechanism through which budget participation can be used to improve employee performance.
PsyCap is a concept that organizations can invest in and develop in their workforce to achieve
veritable, sustained growth and performance (Luthans et al. 2008, 224). Given the increasing
pressure of a global economy, organizations may wish to explore the benefits of PsyCap and its role
in the participationperformance relationship.

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APPENDIX A
Instrument
The following page of the survey is concerned with aspects of your performance. Please rate
your performance as a manager or an employee on the following tasks, Question #1Question #8. It
is important that you answer all of the questions to the best of your ability. Consider only the
performance objectives from 1 through 8. You will be able to respond about your overall
performance in Question #9.
Response anchors: 1 well below average performance, 2 somewhat below average, 3
slightly below average, 4 average, 5 slightly above average, 6 somewhat above average, 7
well above average, 8 not applicable.
1.
2.
3.
4.
5.
6.
7.
8.

Planning:
Investigating:
Coordinating:
Evaluating:
Supervising:
Staffing:
Negotiating:
Representing:

Overall Performance:
9. Rate your overall performance:
Please answer these questions concerning your attitudes and perceptions about the work
environment. Below are statements with which you may agree or disagree. Using the following
scales, indicate your level of agreement or disagreement.
Response anchors: 1 strongly disagree, 2 moderately disagree, 3 mildly disagree, 4 neutral,
5 mildly agree, 6 moderately agree, 7 strongly agree.
1. I am involved in setting all portions of my budget.
2. My budget is not final until I am satisfied with it.
3. My opinion is an important factor in setting my budget.
Please answer these questions concerning aspects of your personality. It is important that
you try to answer each question frankly and honestly.
Response anchors: 1 strongly disagree, 2 disagree, 3 somewhat disagree, 4 somewhat agree,
5 agree, 6 strongly agree.
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The Mediating Effect of Psychological Capital on the Budget Participation

4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.

175

I feel confident analyzing long-term problems to find a solution.

I feel confident in representing my work area in meetings with management.
I feel confident contributing to discussions about the companys strategy.
I feel confident helping to set targets/goals in my work area.
I feel confident contacting people outside the company (e.g., suppliers, customers) to
discuss problems.
I feel confident presenting information to a group of colleagues.
If I should find myself in a jam at work, I could think of many ways to get out of it.
At the present time, I am energetically pursuing my work goals.
There are lots of ways around any problem.
Right now I see myself as being pretty successful at work.
I think of many ways to reach my current work goals.
At this time, I am meeting the work goals that I have set for myself.
When I have a setback at work, I have trouble recovering from it and moving on.
I usually manage difficulties one way or another at work.
I can be on my own so to speak at work if I have to.
I usually take stressful things at work in stride.
I can get through difficult times at work because I have experienced difficulty before.
I feel I can handle many things at a time at this job.
When things are uncertain for me at work, I usually expect the best.
If something can go wrong for me work-wise, it will.
I always look on the bright side of things regarding my job.
I am optimistic about what will happen to me in the future as it pertains to work.
In this job, things never work out the way I want them to.
I approach this job as if every cloud has a silver lining.

Please take the time to fill in the following demographic information and please check the
appropriate box where necessary. This information is also very important to the research question.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Age: _________
Gender: Male ____ Female ____
Highest educational degree attained: Bachelors ____ Masters ____ Doctorate ____
Professional certifications acquired, e.g., CPA, CFA (please list):
________________________________
Number of classes taken at institutions of higher learning which pertain directly to your
job: _____________
Weeks of formal training acquired on the job: ___________
Industry in which you work: _____________
Current position in the firm: _____________
Time (years and months) in your current position: __________
Time (years and months) in a similar position with any firm in the same industry:
________
How long have you been involved in the budgeting process at your firm? ______
For the most recently completed period of evaluation, please indicate your overall
performance rating.
Response anchors: 1 exceeds standards, 2 meets standards, 3 below standards,
4 standards not met.

This is the end of the research questionnaire. Thank you for participating in this survey.
Your responses are sincerely appreciated!
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