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The Accounting Review, Vol. 67, No. 3. (Jul., 1992), pp. 511-526.
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THE ACCOUNTlNG REVIEW
Vol. 67,No. 3
July 1992
pp. 511-526
Figure 1
The Research Model
JOB-RELEVANT
...
INFORMATION (2,)
,..*
pzl=0.397 ,
,
,
,
0
0
... p3,=0.452
,
,
,
,,
---- ----- ---- -- --
-
.PERFORMANCE
A
.
- (23)
PARTICIPATION ( Z I )
p31= 0.034
Note: The subscripts 1, 2, and 3 refer to the variables of participation, JRI, and performance, respectively.
The path coefficients (p,,) indicate the effect of variable j in explaining the variation in variable i.
curate forecasts of environmental states and can focus the manager's attention on deci-
sions and behaviors needed in future periods. It may also increase the time spent
thinking about budgetary objectives and alternative means-end approaches (Earley
et al. 1987; Lawrence and Lorsch 1967; Locke et al. 1986).As a consequence, budgetary
participation can create an environment that encourages the acquisition and use of JRI.
Results of field research provide supporting evidence (Lowe and Shaw 1968; Simons
1987) as does the research on budget-related behaviors (Merchant 1984). Simons' (1987)
field study of the Johnson & Johnson Company provides detailed descriptions of how
budgetary participation promotes extensive JRI search activities by managers, and
these activities appear to occur primarily because the budgetary process is participa-
tory rather than imposed.
Several sources of JRI are available to the manager, including the external environ-
ment (i.e., environmental scanning [see Bourgeois 19851) and peers, subordinates, and
superiors (Hopwood 1976). Earlier research suggests that a manager's superior is a n
effective information source in most organizations, particularly when superiors have
extensive company-specific experience, as in the case of companies that routinely
promote from within (Simons 1987).
Two recent studies have examined the effects of cognitive factors associated with
JRI. Mia (1989) proposed that perceptions of job difficulty moderate the relationship be-
tween budgetary participation and performance because participation provides valu-
able information for difficult jobs. Surveying middle-level managers, Mia found a
positive relationship between participation and performance only when job difficulty
was high.
Chenhall and Brownell (1988) have suggested that role ambiguity links budgetary
participation and performance. In a survey study, they found that participation re-
duced role ambiguity, which improved performance. JRI and role ambiguity are similar
constructs in that the latter reflects the extent to which managers understand their
duties and responsibilities, while the former is a measure of the information available
to managers to accomplish job-related tasks.
The schematic structure in figure 1suggests that participation has an indirect effect
on performance through JRI. Participation is expected to increase JRI initially, which
514 The Accounting Review, July 1992
would in turn improve performance. Thus, JRI serves as the link between participation
and individual performance, suggesting the following hypothesis:
HI: The relationship between budgetary participation and managerial perfor-
mance will be explained by an indirect effect whereby participation increases
job-relevant information, and job-relevant information is positively associated
with performance.
H2b: the link between participation and JRI will be stronger, and
H2c: the link between JRI and performance will be stronger.
dence, Brownell and McInnes assert that pair-wise correlations between the eight vari-
ables should be less than the correlation of each variable with the overall rating. Only
four of the 28 comparisons violated this criterion. Thus, the measure appears to encom-
pass reasonably independent dimensions of performance that are correlated with the
overall measure. To capture a uni-dimension of performance, the eight sub-scale items
were summed up to construct a composite performance scale. The combined scale was
significantly correlated (r=0.840; p < 0.01) with the overall rating (item 9).
Budgetary Participation. This variable was defined as the manager's degree of in-
fluence on the budget. A three-item version of a participation measure employed by
Milani (1975) was used. (This measure is similar to the scale of participatory decision
making used by Abdel-halim and Rowland [I9761 and is based on Vroom [I9601 and
Vroom and Mann [1960].)
A factor analysis of the scale revealed only one factor with an eigenvalue greater
than 3, which explained 76.9 percent of the total variance indicating that only one
construct was being measured. The reliability coefficient computed for the scale in this
study was 0.85. An overall measure of budgetary participation was constructed by
summing up responses to the three individual items.
Job-Relevant Information (JRI). The objective of this measure is to assess the extent
to which managers perceived information availability for effective job-related deci-
sions. Managers with adequate JRI are expected to perceive and report that they have
adequate information to accomplish their job-related objectives and to evaluate impor-
tant decision alternatives.
Based on O'Reilly's (1980) information overload index, a scale was developed for
use in this study, with the wording modified to fit the context of this study (Roberts and
O'Reilly 1974). Several colleagues, working managers, and executive MBA students
with relevant work experience were asked to comment on the scale and concurred on
its face validity.
Factor analysis confirmed the single-factor structure of the scale. Only one factor
was present with an eigenvalue greater than 1 explaining 64.3 percent of the total
variation.. The reliability coefficient calculated for the scale was 0.72. For subsequent
analysis, the items were summed up.
Environmental Volatility. For this study, volatility is defined as change or vari-
ability in the organization's external environment (Tung 1979). Previous studies of en-
vironmental volatility have focused on variability of accounting variables (e.g., sales or
income) at the industry level. Tosi et al. (1973) argue that more stable patterns in such
measures across time indicate more stable environments and thus are easier to predict
(Bourgeois 1985).
Tosi et al. operationalized volatility by using the following three variables: (I)
market volatility, the coefficient of variation of net sales; ( 2 ) technological volatility, the
coefficient of variation of the sum of research and development and capital expendi-
tures divided by total assets; and (3) income volatility, the coefficient of variation of
profits before taxes (used as a composite measure to capture other sources of volatility).
The measures were further verified by Snyder and Glueck (1982). The coefficient of
variation (the variance is standardized by the magnitude) is used because it allows
comparisons across industries of different sizes.
In a later study, Bourgeois (1985) suggested using first differences of the Tosi et al.
measure. Bourgeois argued that a high but constant, and thus predictable, rate of
Kren-Budgetary Participation and Managerial Performance 517
change could produce a high coefficient of variation. However, it is not only the rate of
change that creates volatility, but also the unpredictability of the change (Downey and
Slocum 1975; Milliken 1987). Bourgeois argued that the coefficient of variation of first
differences provides a better measure of discontinuities. Thus, for this study, market,
technological and income volatility were measured by using first differences as follows:
C CV(X,I,
j=1
volatility (Xi)= ,
n
where Xi = market, technological, or income variable and n = number of companies in
the industry (not including the sample company) and,
where Zk= (Xirk and Xi,k= market, technological, or income variable in year k.
For each firm in the sample, industry-level statistics were calculated by using all
other companies listed on Standard and Poor's COMPUSTAT data file with the same
two-digit SIC code. In conformance with previous research, industry-level measures
were used because they seem most relevant to the key dimensions of a company's exter-
nal environment (Bourgeois 1985; Tosi et al. 1973; Tung 1979). The industry-level
measure used in the analysis to be shortly presented was also significantly correlated
with a correspondingly calculated company-level measure ( r = 0.321; p < 0.05).
Factor analysis of the three resulting variables revealed only one factor with an
eigenvalue greater than 1 (explaining 68.1 percent of the total variance), which indi-
cates that only one construct was measured. Thus, the three variables were summed up
to provide an overall measure of volatility.
Of the 63 companies in the sample, 1 7 were significantly diversified conglomerates
or obtained more than 20 percent of their total revenues from unrelated operations as
indicated by segment disclosures in annual reports. Because it was difficult to identify
an appropriate industry reference group for these diversified companies, the analysis of
volatility effects excluded these 1 7 companies (representing 2 1 respondents). Thus, for
subsequent analysis of volatility effects, the sample size was reduced to 59.
Table 1
( n = 80)
Table 2
( n = 80)
- - -
Variables 2 3 4
formance ( r = 0.214; p < 0.07) is weakly significant, which will be explained more
clearly by participation's effects on JRI.
Participation, JRI, and Performance
Hypothesis H I posits that JRI will act as an intervening variable to explain the
relationship between budgetary participation and managerial performance. This hy-
pothesis is tested by using the path analysis model summarized in figure 1.'
Each path coefficient, pi,, indicates the impact of variable j in explaining the
variance in variable i. The values of the path coefficients can be interpreted in units of
standard deviation. For example, the path coefficient of p,, =0.397 in figure 1 indicates
that for every standard deviation increase in the participation measure, the data predict
a 0.397 standard deviation increase in JRI.
' Path analysis is a n application of regression and correlation appropriate for estimating a series of interre-
lated parameters (Wonnacott and Wonnacott 1981). It allows statistical analysis of the direct contribution of
participation to performance and its indirect contribution through JRI. This is accomplished by estimating the
values of the path coefficients designated p,, in figure 1.
Kren-Budgetary Participation and Managerial Performance 519
A series of regressions are used to estimate the path coefficients, according to the
following,
Z2=p21Z1, (1)
Z3=p31Z1+p32Z2, (2)
where, Z1 is the measure of participation, Z2 is JRI, and Z3 is performance. Each
variable is standardized to a mean of zero and a standard deviation of 1.
The path coefficients also can be used to decompose the total relationship between
two variables (i.e., performance and participation) into direct and indirect effects (i.e.,
through JRI). The total relationship can be measured with the zero-order correlation
coefficient, r,. Thus,
r23=p32+p31r12; (4)
r13=p3]+P32r12. (5)
The subscripts 1, 2, and 3 refer to the variables of participation, JRI, and perfor-
mance, respectively (see fig. 1).The first term on the right-hand side is an estimate of
the direct effect (the path coefficient), or the effects through unobserved intervening
variables. The second term is an estimate of the indirect effect or, in the absence of pre-
dicted indirect effects, the second term provides an estimate of spurious effects. Thus,
for this study, equation (4) allows decomposition of the total relationship between JRI
and performance (r2,) into a direct effect ( P ~ and ~ ) a spurious effect (p3]r12).The
spurious effect results from participation, which is a common antecedent of both JRI
and performance. Equation (5) allows decomposition of the total relationship between
participation and performance (I-,,) into a direct effect ( ~ 3 1 )and the indirect effect
through JRI (p32r12). Hypothesis H I posits that the indirect effects of participation
through JRI, will predominate.
The results of estimating equations (1)and (2)for the total sample are shown in table
3 and figure 1.The direct path between participation and performance (p,,) was not, as
expected, statistically significant. However, the path coefficients between participation
and JRI (p,,) and between JRI and performance Up3,) were significant at conventional
levels. Both regression models were significant, also at conventional levels.
The decomposition of the linkages in the model (eqs. [3], [4], and [5]) is shown in
table 4. The prediction of hypothesis H1 was that most of the effect of participation on
performance would be indirect (through JRI) with little direct effect. The results shown
in table 4 (eq. [5]) support this prediction. The direct effect of participation on perfor-
mance (0.034) is small relative to the indirect effect through JRI (0.180). Thus, for every
standard deviation increase in participation (eq. [3]), JRI increases by 0.397 standard
deviation, and for every standard deviation increase in JRI (eq. [4]), performance
increases by 0.466 standard deviation. In total, for every standard deviation increase in
participation, performance increases by 0.180 standard deviation. In addition, only a
small portion of the relationship between information and performance (eq. [4]) is
spurious (0.014) relative to the direct effect (0.452). Overall, the results are consistent
with hypothesis HI.
The Accounting Review, July 1992
Table 3
Equation ( 1):
Information1
Participation P21 0.397 3.77** 0.442 2.61* 0.252 1.30
Equation (2):
Performancel
Information P32 0.452 4.06** 0.606 3.60** 0.607 3.50**
Performancel
Participation P31 0.034 0.31 0.029 0.17 -0.121 -0.71
Dependent Total Direct Indirect1 Total Direct Indirect1 Total Direct Indirect1
Variable1 Effect Effect Spurious Effect Effect Spurious Effect Effect Spurious
Link to rc, P 11 Effect P 8, Effect r,, P 8, Effect
Equation (3):
Information1
Participation 0.397 0.397 -
Equation (4):
Performancel
Information 0.466 0.452 0.014" 0.619 0.606 0.013"
Equation (5):
Performancel
Participation 0.214 0.034 0.180' 0.297 0.029 0.268' 0.030 -0.121 0.151'
Figure 2
IOB-RELEVANT
. Y
PERFORMANCE ( Z , )
IOB-RELEVANT
this is consistent with the proposition that participation was used more effectively to
acquire JRI when volatility was high. However, a general linear test (Neter and
Wasserman 1974) indicates that the path coefficients ( p 2 , )at the two levels of volatility
are not significantly different from each other (F2,55=1.12), SO the support for hypoth-
esis H2b is ambiguous.
The results do not support hypothesis H2c that the link between JRI and perfor-
mance would be stronger at the high level of volatility. The path coefficients between
JRI and performance (p,,) are highly significant at both levels of volatility and are not
significantly different from each other, which indicates that, contrary to expectations,
the relationship between JRI and performance is unaffected by the level of volatility.
The decomposition of the model linkages (eqs. 131, [4], and [5]) for high and low
levels of volatility is shown in table 4. At both levels, the indirect effect of participation
on performance through information is greater than the direct effect (eq. [5]). When
volatility is high, the indirect effect of participation (0.268) is greater than the corre-
sponding indirect effect when volatility was low (0.151). This is consistent with expec-
tations that participation would be more strongly associated with performance when it
is more useful in providing JRI, as when volatility is high. Once again, however, strong
evidence of volatility effects is not present because estimates of the regression model in
equation (2) are not significantly different across levels of volatility (F3,53 = 0.70).
Kren-Budgetary Participation and Managerial Performance 523
Appendix A
List of Industries Included in the Sample
-- - - - ---
Number of Number of
Industry Companies Respondents
Appendix B
Abbreviated Research Questionnaire
Participation
Q1. I am involved in setting all portions of my budget. (Response anchors: 1 =strongly disagree, 7=strongIy
agree.)
4 2 . My budget is not final until I am satisfied with it. (Response anchors: 1 =strongly disagree, 7=strongly
agree.)
4 3 . My opinion is a n important factor in setting my budget. (Response anchors: l=strongly disagree,
7 =strongly agree.)
Job-Relevant Information
Q1. I am always clear about what is necessary to perform well on my job. (Response anchors: 1 =strongly
disagree, 7 =strongly agree.)
4 2 . I have adequate information to make optimal decisions to accomplish my performance objectives.
(Response anchors: 1=strongly disagree, 7 =strongly agree.)
4 3 . I am able to obtain the strategic information necessary to evaluate important decision alternatives.
(Response anchors: 1=strongly disagree, 7 =strongly agree.)
Kren-Budgetary Participation and Managerial Performance
Appendix B--Continued
Performance
Rate your performance as a manager on the following tasks. (Response anchors: 1 =below average perfor-
mance, 7 =above average performance.]
1. Planning
2. Investigating
3. Coordinating
4. Evaluating
5. Supervising
6. Staffing
7. Negotiating
8. Representing
9. Rate your overall performance
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Three Types of Perceived Uncertainty about the Environment: State, Effect, and Response
Uncertainty
Frances J. Milliken
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Perceived Participation in the Budget Process and Motivation to Achieve the Budget
D. Gerald Searfoss; Robert M. Monczka
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