Maiga 2007
Maiga 2007
Maiga 2007
ABSTRACT
INTRODUCTION
other stakeholders, most of the ethical issues being raised are related to
external financial reporting and other related disclosures. However, little
attention has been given to losses to a company, which are inevitably passed
on to all stakeholders, related to suboptimal allocation of resources due, in
part, to the misrepresentation of information within the firm through the
occurrences of budget slack. Budget slack is created by lower level managers
to exploit private information through the introduction of slack, which is
the amount by which managers overstate their needs for resources to
complete a task or understate their productive capability when given the
opportunity to influence the standard against which their performance will
be evaluated (Schiff & Lewin, 1970). Similarly, managers who misrepresent
private information regarding resource needs or production capacity may
receive excess resources that can be diverted to perquisite consumption
(Waller & Bishop, 1990). This opportunistic use of private information is
commonly cited as an ethical issue because slack creation may be
inconsistent with role-related norms and desired virtues of professional
managers and accountants. Furthermore, the resource misallocation that
results is detrimental to other organizational units, to investors, and other
stakeholders (Douglas & Wier, 2000). Thus, creation of budgetary slack is
an ethical dilemma, a predicament with a moral component on the part of
the decision-maker (Douglas & Wier, 2000, 2005).
Agency theory is based upon the assumptions of economic rationality of
all contracting parties within the firm and that resulting behaviors of agents
will reflect self-interest. When agents have private information and are able
to conceal that information from their superiors, they may misrepresent that
information to maximize their own utility functions. Building in budget
slack by agents, according to agency theory, is one form of increasing
agency costs because decisions regarding resource allocations can become
suboptimal because these decisions are based on incorrect information.
Prior studies suggest that ethical considerations may moderate agency
effects. Agency theory, however, is one theory of human behavior among
many theories that have been posited in extant literature. Experimental
studies on slack creation decisions (Young, 1985; Waller, 1988; Chow,
Cooper, & Waller, 1988; Chow, Cooper, & Haddad, 1991) and project
evaluation decisions (Harrison & Harrell, 1993; Harrell & Harrison, 1994)
have found that some subjects violate classical agency predictions. For
example, Young (1985) found that social pressure reduced slack creation.
The literature also suggests that factors described as ‘‘aversion to lying’’
(Chow et al., 1991), ‘‘personal integrity’’ (Chow et al., 1988), and ‘‘ethical
considerations’’ (Noreen, 1988) may potentially mitigate self-interested
Moderating Effect of Manager’s Ethical Judgment 115
BACKGROUND
HYPOTHESES DEVELOPMENT
The objective of this study is to integrate prior research and to offer new
empirical evidence on the moderating effects of managers’ ethical judgment
on the relationship between budget participation and budget slack. The
overall theoretical model is illustrated in Fig. 1.
Moral Equity
Ethical Judgment
- Moral Equity
- Contractualism
- Relativism
Contractualism
investments of capital that are available (Bowie & Freeman, 1992). Hence,
we posit that manager’s ethical action, as measured by contractualism, the
implicit moral contract, will moderate the relationship between his level of
budget participation and his propensity to create slack. More specifically,
Relativism
Ethical relativism is the thesis that ethical principles or judgments are relative
to the individual or culture (Lafollette, 1991). Since relativism bases
judgment of the acceptability of an action on cultural or social norms, prior
studies suggest that what is traditionally or culturally acceptable appears also
to play an evaluative role in the ethical decision-making process (Ferrell &
Gresham, 1985). This is in support of Trevino (1986) who acknowledges the
impact of culture on the ethical behavior of managers. Additionally,
Reidenbach and Robin (1991) acknowledge a strong interaction between
culture and tradition and the notion of right and wrong.
Hunt and Vitell’s (1986) findings suggest that beliefs about what is
culturally and traditionally acceptable play a direct role in the evaluative
process. In a non-prescriptive study of professional responsibilities, Gaa
(1990) showed that the opportunities for professionals to act in their own
self-interest and disregard their responsibilities allow structural instability in
the relationship between professionals and society. However, the process
of internalizing ethical sanctions may be an opportunity to stabilize the
‘‘social contract’’ between the accounting profession and society referred to
by Gaa (1986, 1990). Therefore, ethical concerns can be determined by the
individual’s value system, which evolves from internalized social norms.
The above discussion suggests that budgetary slack, with its potential to
mislead the principal and transfer resources to the subordinate, is likely to
raise traditional and socio-cultural concerns within managers. Hence, we
expect the proposed effects of ethical judgment based on managers’
traditional and cultural norms, as measured by relativism, to moderate the
impact of budget participation on budget slack. Therefore,
RESEARCH METHOD
Sample
and relativism. The measures and the scenarios appear in the appendix
along with a description of questionnaire construction.
Budgetary slack: Measuring the actual budgetary slack within an org-
anization’s budget is extremely difficult. Thus, this study used ‘‘propensity
to create slack,’’ a self-reported measure, as a surrogate measure under the
assumption that actual slack and the manager’s propensity to create slack
are highly correlated. Propensity to create slack is operationalized using the
three-item scale found in Kren (1993) and adapted from Merchant (1985).
Merchant’s original four-item scale was examined by Hughes and Kwon
(1990) who suggested deleting one item to improve the scale’s reliability.
Thus this study uses the three items suggested by Hughes and Kwon (1990).
The response scale was a seven-point Likert-type scale ranging from 1
(strongly disagree) to 7 (strongly agree). To examine the extent to which
these measures are interrelated, we used principal component analysis with
varimax rotation, which produced one factor with total variance of 88.208%
and an eigenvalue greater than one. A reliability check for the measures
produced a Cronbach alpha of 0.928, indicating that the measures were
reliable (Nunnally, 1967).
Budget participation was measured using the Milani’s (1975) six-item
measure. The response scale was a seven-point Likert-type scale ranging from
1 (strongly disagree) to 7 (strongly agree). A principal component analysis
with varimax rotation produced one factor with total variance of 86.154%
and an eigenvalue greater than one. A reliability check for the measures
produced a Cronbach alpha of 0.905, indicating that the measures were
reliable.
Ethical judgment: The questionnaire contains a reduced set of measures
developed by Reidenbach and Robin (1991). The measure focuses on the
dynamics of decision-making regarding managers’ ethical judgment. It
consists of eight bipolar scales divided into three dimensions – moral equity,
relativism, and contractualism (see appendix). In a subsequent study, Flory
et al. (1992) used four of the five scenarios (see appendix) that the IMA
Resources Center developed. This provided a useful step in developing a
measure of ethical judgment because they portray substantially more
involved, realistic situations. Each scenario includes an action statement
to assure that all respondents were reacting to the same stimulus. The
action statement was particularly necessary with the more complex
situations described in this research. Consequently, the four scenarios are
used in this study.
Each scenario portrays a different kind of ethical dilemma. Scenarios A
and D describe actions that might not be perceived as explicitly ethical or
122 ADAM S. MAIGA AND FRED A. JACOBS
Dimension A B C D A B C D A B C D
Moral equity
Fair/unfair 0.859 0.873 0.799 0.884 0.054 0.143 0.170 0.017 0.033 0.019 0.028 0.088
Just/unjust 0.925 0.920 0.886 0.851 0.072 0.168 0.047 0.029 0.049 0.022 0.015 0.158
Moraly right/not morally right 0.903 0.885 0.774 0.799 0.056 0.002 0.073 0.065 0.035 0.026 0.036 0.114
Acceptable/unacceptable to famility 0.680 0.620 0.706 0.686 0.109 0.089 0.039 0.163 0.187 0.062 0.101 0.137
Contractualism
Violates/does not violate promise 0.127 0.026 0.162 0.178 0.884 0.874 0.905 0.904 0.057 0.081 0.146 0.039
Violates/does not violate contract 0.268 0.155 0.039 0.097 0.864 0.853 0.934 0.840 0.054 0.116 0.139 0.271
Relativism
Traditionally acceptable/unacceptable 0.178 0.115 0.162 0.019 0.008 0.256 0.021 0.020 0.803 0.711 0.802 0.858
Culturally acceptable/unacceptable 0.107 0.032 0.044 0.027 0.071 0.045 0.023 0.215 0.851 0.890 0.846 0.762
123
124 ADAM S. MAIGA AND FRED A. JACOBS
Scenario
A B C D
To assess the content validity of the scales, we followed Flory et al. (1992)
to test whether our constructs in fact measure manager’s ethical judgment.
We compared the three dimensions with manager’s ethical intention in
response to each scenario which was measured by the response opportu-
nities on a seven-point bipolar scale range from 1 (ethical) to 7 (unethical).
The results of a common validation procedure, based on regression analysis,
in the social sciences appear in Table 3. A high covariation (R2) between
ethical intention and ethical judgment measures suggests that the ethical
judgment captures much of what the respondents mean by ‘‘ethical.’’
Additionally, the individual beta values for each of the three dimensions,
and in each of the scenarios, also helped to define the concept of ‘‘ethics’’ for
the respondents. As Table 3 indicates, the three dimensions explain from
56.70% to 80.80% of the variance in what the managers defined as ethical,
suggesting that the ethical judgment measures capture much of what the
respondents mean by ‘‘ethical.’’
Next, we assessed predictive validity of the scales. The behavioral
intention of the respondent in response to each scenario was measured by
the statement, ‘‘If you were responsible for making the decision described
in the scenario, what is the probability that you would make the same
decision?’’ The response opportunities were reported on a seven-point
bipolar scale range from highly probable to highly improbable. The relevant
R2s, shown in Table 4, from ‘‘predicting’’ this measure with the multivariate
ethics scale range from 0.771 to 0.890, satisfying the expectations for
predictive validity.
In addition, control for common method bias was accomplished in two
primary ways: the design of the study’s procedures (procedural remedies)
and statistical controls (statistical remedies). The design of the study’s
procedures consists of (1) assuring respondents of anonymity (Podsakoff,
Moderating Effect of Manager’s Ethical Judgment 125
R2 b1 b2 b3
R2 b1 b2 b3
MacKenzie, & Lee, 2003), (2) careful construction of the variable constructs,
and (3) counterbalancing the question order (Podsakoff et al., 2003). This
approach is known to have the effect of neutralizing some of the method
biases that affect the retrieval stage by controlling the retrieval cues
prompted by the question context. The statistical control consists of the use
of Harman’s (1976) one-factor test (discussed in the results section).
We performed Harman’s (1976) one-factor test to assess common method
variance; this is one of the techniques used most by researchers to address
the issue of common method variance (Campbell & Fiske, 1982; Greene &
Organ, 1973; Schriesheim, 1979; Organ & Greene, 1981; Fiske, 1982;
Anderson & Bateman, 1997; Aulakh & Genctruk, 2000). Under this
method, if common method variance were a serious problem in the study,
we would expect a single factor to emerge from a factor analysis or one
general factor to account for most of the covariance in the variables
126 ADAM S. MAIGA AND FRED A. JACOBS
RESULTS
The results are presented in two parts. First, we present the descriptive
statistics. Next, we explain the results from the regression models used to
test the hypotheses.
Moderating Effect of Manager’s Ethical Judgment 127
Descriptive Statistics
Table 5 reports the data for the study. The data was obtained from 251
managers, from different companies, in the manufacturing industry with the
following job titles: 49 plant managers, 32 manufacturing managers, 48
operations managers, 43 marketing managers, 41 research managers, and 38
distribution managers. Table 5 also provides the profile of the responding
companies that constitute a broad spectrum of manufacturers as defined by
the 2-digit SIC codes. The classification by the primary 2-digit SIC code
place the respondents in the electronic and other electric equipment industry
(38), instruments and related products (22), chemical and allied products
(48), fabricated metal (37), primary metal industries (39), food and kindred
products (28), paper and allied products (18), and apparel and other
fabricated textile products (21).
In Table 6, the mean values of the variables used to test the hypotheses
denote that many respondents indicated some probability of engaging in the
activity specified in the scenarios and their level of budget participation.
Additional information on respondents’ characteristics is provided in
Table 6. The respondents to the question regarding number of years with
the division had a mean of 9.14 years in their current position. To the
number of years in management question, respondents indicated a mean of
13.12 years. The results also show that the average number of employees
equals 241. For the 194 divisions that provided sales figures, the mean was
$5.324 million.
Hypotheses Tests
Ethical judgment
Scenario A
Moral equity 4.651 1.582
Contractualism 3.414 1.321
Relativism 4.295 1.250
Scenario B
Moral equity 4.786 1.527
Contractualism 4.803 1.414
Relativism 4.823 1.274
Scenario C
Moral equity 4.950 1.421
Contractualism 4.572 1.444
Relativism 4.357 1.282
Scenario D
Moral equity 4.880 1.428
Contractualism 4.645 1.406
Relativism 4.761 1.26
Ethical measure and behavioral intention measure
Scenario A
Ethical intention measure 5.332 0.889
Behavioral intention measure 5.489 0.844
Scenario B
Ethical intention measure 5.772 0.790
Behavioral intention measure 5.812 0.810
Scenario C
Ethical intention measure 5.539 0.863
Behavioral intention measure 5.687 0.765
Scenario D
Ethical intention measure 5.577 0.905
Behavioral intention measure 5.720 0.806
Scenario A Scenario B
ME 0.092 1.570 0.118 0.104 1.863 0.064 0.027 0.449 0.653 0.008 0.141 0.888
CT 0.288 4.964 0.000 0.273 4.802 0.000 0.195 3.178 0.002 0.214 3.666 0.000
RL 0.163 2.869 0.004 0.107 1.972 0.050 0.083 1.356 0.176 0.098 1.671 0.096
BP 0.338 5.806 0.000 0.335 5.750 0.000 0.295 4.900 0.000 0.272 4.445 0.000
ME BP 0.093 1.611 0.108 0.170 2.847 0.005
CT BP 0.231 4.176 0.000 0.229 3.929 0.000
RL BP 0.190 3.436 0.001 0.072 1.243 0.215
Scenario C Scenario D
ME 0.016 0.257 0.797 0.006 0.097 0.923 0.024 0.412 0.681 0.046 0.847 0.398
CT 0.177 2.957 0.003 0.183 3.213 0.001 0.237 4.138 0.000 0.270 4.930 0.000
RL 0.007 0.118 0.906 0.007 0.122 0.903 0.244 4.287 0.000 0.228 4.252 0.000
BP 0.317 5.212 0.000 0.280 4.567 0.000 0.319 5.573 0.000 0.302 5.248 0.000
ME BP 0.163 2.706 0.007 0.119 2.131 0.034
CT BP 0.183 3.209 0.002 0.254 4.712 0.000
RL BP 0.194 3.386 0.001 0.125 2.369 0.019
R2 0.132 0.234 0.241 0.342
R2-change 0.102 0.101
F-value 10.610 o.0001 18.049 o.0001
Notes: ME, Moral equity; CT, Contractualism; RL, Relativism; BP, Budget participation.
Moderating Effect of Manager’s Ethical Judgment 131
NOTES
1. The term business unit is used to refer to a self-contained sub-unit (e.g.,
division) of a larger corporation.
2. This ethical issue, although suggested in agency theory is not included in the
agency model.
3. It may be that behaving according to one’s sense of ethical conduct is in the
self-interest of the manager. This form of ‘‘utility’’ to ‘‘self’’ is excluded from the
agency model, which assumes that ‘‘economic’’ rewards are uniquely in the self-
interest of managers. Nevertheless, it is included in classical ‘‘utility theory.’’
4. Because of contravening company policy, some preferred not to participate.
5. We used discriminant analysis to compare the groups of respondents, the early
and late respondents (Fowler, 1993). Results revealed that the two groups did not
differ significantly in either the level of the variables or in the relationship between the
variables at the 0.05 level. This suggests that non-response bias may not be a problem.
134 ADAM S. MAIGA AND FRED A. JACOBS
ACKNOWLEDGMENTS
We benefited greatly from the helpful guidance and comments from Govind
Iyer (associate editor), and two anonymous reviewers.
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APPENDIX
PART I
SCENARIOS (IMA Resources Center, Reidenbach & Robin, 1991;
Flory et al., 1992)
The following four scenarios were used in this study. Each scenario
appeared on a separate page followed by brief instructions, a randomized
presentation of the scales, the univariate ethics measure, and the behavioral
intention measure as shown below.
138 ADAM S. MAIGA AND FRED A. JACOBS
Scenario A
ACTION: Tom decides not to report the expense charge to the Audit
Committee. Please evaluate this action of Tom Waterman.
RELATIVISM DIMENSION
Culturally acceptable ___ ___ ___ ___ ___ ___ ___ Culturally
unacceptable
Traditionally acceptable ___ ___ ___ ___ ___ ___ ___ Traditionally
unacceptable
Moderating Effect of Manager’s Ethical Judgment 139
CONTRACTUALISM DIMENSION
Does not violate an Violates an
unwritten contract ___ ___ ___ ___ ___ ___ ___ unwritten contract
Violates an Does not violate an
unspoken promise ___ ___ ___ ___ ___ ___ ___ unspoken promise
Scenario B
RELATIVISM DIMENSION
Culturally acceptable ___ ___ ___ ___ ___ ___ ___ Culturally
unacceptable
Traditionally acceptable ___ ___ ___ ___ ___ ___ ___ Traditionally
unacceptable
CONTRACTUALISM DIMENSION
Does not violate an ___ ___ ___ ___ ___ ___ ___ Violates an
unwritten contract ___ ___ ___ ___ ___ ___ ___ unwritten contract
Violates an ___ ___ ___ ___ ___ ___ ___ Does not violate an
unspoken promise ___ ___ ___ ___ ___ ___ ___ unspoken promise
Highly probable ___ ___ ___ ___ ___ ___ ___ Highly improbable
Moderating Effect of Manager’s Ethical Judgment 141
Scenario C
ACTION: Feeling certain that the system will fail without the upgrade,
Drew agrees to approve the additional expense. Please evaluate this action
of Drew Isler.
MORAL EQUITY DIMENSION
Fair ___ ___ ___ ___ ___ ___ ___ Unfair
Just ___ ___ ___ ___ ___ ___ ___ Unjust
Morally right ___ ___ ___ ___ ___ ___ ___ Not morally right
Acceptable to my family ___ ___ ___ ___ ___ ___ ___ Unacceptable to my
family
RELATIVISM DIMENSION
Culturally acceptable ___ ___ ___ ___ ___ ___ ___ Culturally
unacceptable
Traditionally acceptable ___ ___ ___ ___ ___ ___ ___ Traditionally
unacceptable
142 ADAM S. MAIGA AND FRED A. JACOBS
CONTRACTUALISM DIMENSION
Does not violate an ___ ___ ___ ___ ___ ___ ___ Violates an
unwritten contract ___ ___ ___ ___ ___ ___ ___ unwritten contract
Violates an ___ ___ ___ ___ ___ ___ ___ Does not violate an
unspoken promise ___ ___ ___ ___ ___ ___ ___ unspoken promise
If you were responsible for making the decision described in the scenario,
how would you judge the decision?
Ethical ___ ___ ___ ___ ___ ___ ___ Unethical
If you were responsible for making the decision described in the scenario,
what is the probability that you would make the same decision?
Highly probable ___ ___ ___ ___ ___ ___ ___ Highly improbable
Scenario D
ACTION: Paul decides to make the sale to his friend’s new business. Please
evaluate this action of Paul Tate.
RELATIVISM DIMENSION
Culturally acceptable ___ ___ ___ ___ ___ ___ ___ Culturally
unacceptable
Traditionally acceptable ___ ___ ___ ___ ___ ___ ___ Traditionally
unacceptable
CONTRACTUALISM DIMENSION
Violates an ___ ___ ___ ___ ___ ___ ___ Does not violate an
unwritten contract ___ ___ ___ ___ ___ ___ ___ unwritten contract
Violates an ___ ___ ___ ___ ___ ___ ___ Does not violate an
unspoken promise ___ ___ ___ ___ ___ ___ ___ unspoken promise
If you were responsible for making the decision described in the scenario,
how would you judge the decision?
Ethical ___ ___ ___ ___ ___ ___ ___ Unethical
If you were responsible for making the decision described in the scenario,
what is the probability that you would make the same decision?
Highly probable ___ ___ ___ ___ ___ ___ ___ Highly improbable
144 ADAM S. MAIGA AND FRED A. JACOBS
PART II
PART III
Please provide the following information for the person completing the
questionnaire:
1. What is your present job title?_________
2. Number of years at this position?_________
3. Number of years in management_________
PART IV
PART V
If you answer to both 1 and 2 in Part IV is yes, please answer the remaining
parts of the questionnaire, otherwise stop at Part IV and return the
questionnaire.
PARTICIPATION
(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 of my budget
2. My superior clearly explains budget revisions
3. I have frequent budget-related discussions with my superior
4. I have a great deal of influence on my final budget
Moderating Effect of Manager’s Ethical Judgment 145