Honesty and Social Norms in Budgeting

What is it about?

Research in budgeting suggests that contextual factors may have a considerable influence on budget reporting honesty. Therefore, the present study investigates managers' honesty in the presence of different social norms. While there are several studies that look at the impact of descriptive social norms (what one actually does) on managerial honesty, injunctive social norms (what one ought to do) have not received a lot of attention in the literature. As concrete actions of peers are rarely observable in the budgeting process, this study focuses on the effect of injunctive norms for honesty/opportunism on budget reporting honesty. Moreover, the role of dissenters from the norm is investigated. The results from a laboratory experiment suggest that injunctive norms can have a considerable influence on managers' budget reporting behavior because many people conform to the preferences of their peer group. However, the effect of injunctive norms decreases substantially when there are minorities that show alternative preferences. With the use of the experimental data, the expected firm profit is calculated under different contracts. As the managers show considerable levels of honesty, a trust contract should be preferred compared to a hurdle contract, which is derived from conventional economic theory. Companies should therefore consider injunctive norms as a possible device to positively affect their managers' honesty and the respective firm profit.

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Photo by Sam Field on Unsplash

Photo by Sam Field on Unsplash

Why is it important?

Considering social norms regarding managers' honesty in the budgeting process is essential for fostering an ethical organizational culture, building trust with stakeholders, and contributing to the long-term sustainability and success of an organization.