The effects of information asymmetry on budget slack: an experimental research

Abstract

Budget slack has been investigated as an organizational and behavioral matter and defined as the value through which managers intentionally set additional obligation to the resource of a certain budget or consciously underestimate productive capability. Based on the principles of agency theory, this research aims to scrutinize the effects of information asymmetry on budget slack in an organizational context where agents are compensated through budget-based compensation plans. In order to do so we used a positive approach-based research in which an experiment with independent samples which comprised of 233 professionals was carried out; its instruments for data analysis were the test t and factorial analysis. The results confirm the hypotheses of agency theory. We identified that, regardless of the position held in a company (principal or agent), they both use information asymmetry to set budget goals with slack, that is, beyond real necessity. This action occurs ex ante and ex post the company sets out the budgeting deadline date. We also identified that budget slack is transversal to the position held and is not only a means of manipulation by the agents. Through this experiment we could prove that information asymmetry sets a favorable environment for increasing budget slack.