IDEAS home Printed from https://ideas.repec.org/a/spr/jmgtco/v32y2021i2d10.1007_s00187-020-00311-2.html
   My bibliography  Save this article

The effect of information transparency on capital budgeting with privately informed agents: a short research note

Author

Listed:
  • Anthony D. Nikias

    (Farmingdale State College)

  • Steven T. Schwartz

    (Binghamton University)

  • Richard A. Young

    (The Ohio State University)

Abstract

This paper reports on an experiment designed to examine the effects of information transparency in a multi-agent capital budgeting setting. Two subordinates with private information regarding their own project costs submit budget requests to a superior who observes both requests before deciding which projects to fund. In the high transparency (low transparency) treatment, subordinates observe (do not observe) each other’s costs. We find that in the high transparency treatment, subordinates’ requests increase when the other subordinate’s cost is known. Further, subordinates submit significantly higher budget requests on average in the high transparency treatment. In response, superiors are more likely to reject budgets in the high transparency treatment, reducing efficiency. These results suggest that while information sharing may improve decision making in many settings, it may also come at a cost when privately informed subordinates have access to information on other subordinates’ projects.

Suggested Citation

  • Anthony D. Nikias & Steven T. Schwartz & Richard A. Young, 2021. "The effect of information transparency on capital budgeting with privately informed agents: a short research note," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 32(2), pages 253-268, June.
    • Handle: RePEc:spr:jmgtco:v:32:y:2021:i:2:d:10.1007_s00187-020-00311-2
    DOI: 10.1007/s00187-020-00311-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00187-020-00311-2
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00187-020-00311-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. R. Lynn Hannan & Frederick W. Rankin & Kristy L. Towry, 2006. "The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective," Contemporary Accounting Research, John Wiley & Sons, vol. 23(4), pages 885-918, December.
    2. Markus Brunner & Andreas Ostermaier, 2019. "Peer Influence on Managerial Honesty: The Role of Transparency and Expectations," Journal of Business Ethics, Springer, vol. 154(1), pages 127-145, January.
    3. Abigail S. Hornstein & Minyuan Zhao, 2011. "Corporate Capital Budgeting Decisions and Information Sharing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1135-1170, December.
    4. Alan Sanfey, 2009. "Expectations and social decision-making: biasing effects of prior knowledge on Ultimatum responses," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 8(1), pages 93-107, June.
    5. Iris Bohnet & Richard Zeckhauser, 2004. "Social Comparisons in Ultimatum Bargaining," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 495-510, October.
    6. Houser, Daniel & Levy, David M. & Padgitt, Kail & Peart, Sandra J. & Xiao, Erte, 2014. "Raising the price of talk: An experimental analysis of transparent leadership," Journal of Economic Behavior & Organization, Elsevier, vol. 105(C), pages 208-218.
    7. Rick Antle & John Fellingham, 1997. "Models of Capital Investments with Private Information and Incentives: a Selective Review," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7‐8), pages 887-908, September.
    8. Rick Antle & John Fellingham, 1997. "Models of Capital Investments with Private Information and Incentives: a Selective Review," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7&8), pages 887-908.
    9. John H. Evans & Donald V. Moser & Andrew H. Newman & Bryan R. Stikeleather, 2016. "Honor Among Thieves: Open Internal Reporting and Managerial Collusion," Contemporary Accounting Research, John Wiley & Sons, vol. 33(4), pages 1375-1402, December.
    10. Anja Schwering, 2017. "The influence of peer honesty and anonymity on managerial reporting," Journal of Business Economics, Springer, vol. 87(9), pages 1151-1172, December.
    11. Rick Antle & Gary D. Eppen, 1985. "Capital Rationing and Organizational Slack in Capital Budgeting," Management Science, INFORMS, vol. 31(2), pages 163-174, February.
    12. Ching-To Ma, 1988. "Unique Implementation of Incentive Contracts with Many Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 555-572.
    13. Rupert Sausgruber, 2009. "A note on peer effects between teams," Experimental Economics, Springer;Economic Science Association, vol. 12(2), pages 193-201, June.
    14. Christopher S. Armstrong & Wayne R. Guay & Hamid Mehran & Joseph P. Weber, 2016. "The role of financial reporting and transparency in corporate governance," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 107-128.
    15. Joyce E. Berg & Lane A. Daley & John W. Dickhaut & John R. O'Brien, 1986. "Controlling Preferences for Lotteries on Units of Experimental Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 281-306.
    16. Eddy Cardinaels & Huaxiang Yin, 2015. "Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts," Journal of Accounting Research, Wiley Blackwell, vol. 53(5), pages 985-1015, December.
    17. Russell Golman & David Hagmann & George Loewenstein, 2017. "Information Avoidance," Journal of Economic Literature, American Economic Association, vol. 55(1), pages 96-135, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christian Daumoser & Bernhard Hirsch & Matthias Sohn, 2018. "Honesty in budgeting: a review of morality and control aspects in the budgetary slack literature," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 29(2), pages 115-159, August.
    2. Nikias, Anthony D. & Schwartz, Steven T. & Young, Richard A., 2009. "A note on bundling budgets to achieve management control," Journal of Accounting Education, Elsevier, vol. 27(3), pages 168-184.
    3. Abdel-Rahim, Heba Y. & Stevens, Douglas E., 2018. "Information system precision and honesty in managerial reporting: A re-examination of information asymmetry effects," Accounting, Organizations and Society, Elsevier, vol. 64(C), pages 31-43.
    4. Markus Brunner & Andreas Ostermaier, 2019. "Peer Influence on Managerial Honesty: The Role of Transparency and Expectations," Journal of Business Ethics, Springer, vol. 154(1), pages 127-145, January.
    5. Hoang, Daniel & Gatzer, Sebastian & Ruckes, Martin E., 2018. "The economics of capital allocation in firms: Evidence from internal capital markets," Working Paper Series in Economics 115, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    6. Thomas Pfeiffer & Georg Schneider, 2007. "Residual Income-Based Compensation Plans for Controlling Investment Decisions Under Sequential Private Information," Management Science, INFORMS, vol. 53(3), pages 495-507, March.
    7. Ruan, Qinnan, 2022. "Management control systems and ethical decision making," Other publications TiSEM 3b6dc74f-fd2a-48ef-b1a9-c, Tilburg University, School of Economics and Management.
    8. Arleta Rasmußen, 2015. "Reporting behavior: a literature review of experimental studies," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(2), pages 283-311, June.
    9. Rick Antle & Peter Bogetoft & Andrew W. Stark, 1999. "Selection from Many Investments with Managerial Private Information," Contemporary Accounting Research, John Wiley & Sons, vol. 16(3), pages 397-418, September.
    10. Laux, Volker, 2008. "On the value of influence activities for capital budgeting," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 625-635, March.
    11. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December.
    12. Rick Antle & Peter Bogetoft, 2019. "Mix Stickiness Under Asymmetric Cost Information," Management Science, INFORMS, vol. 67(6), pages 2787-2812, June.
    13. Douthit, Jeremy & Majerczyk, Michael, 2019. "Subordinate perceptions of the superior and agency costs: Theory and evidence," Accounting, Organizations and Society, Elsevier, vol. 78(C).
    14. Anil Arya & Brian Mittendorf, 2006. "Project Assignments When Budget Padding Taints Resource Allocation," Management Science, INFORMS, vol. 52(9), pages 1345-1358, September.
    15. Brink, Alisa G. & Coats, Jennifer C. & Rankin, Frederick W., 2018. "Who’s the boss? The economic and behavioral implications of various characterizations of the superior in participative budgeting research," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 89-105.
    16. Antle, Rick & Bogetoft, Peter & Stark, Andrew W., 2001. "Information systems, incentives and the timing of investments," Journal of Accounting and Public Policy, Elsevier, vol. 20(4-5), pages 267-294.
    17. Anil Arya, 2002. "Synergy among Seemingly Independent Activities," Contemporary Accounting Research, John Wiley & Sons, vol. 19(3), pages 349-363, September.
    18. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2015. "Internal Capital Markets and Diversified Firms: Theory and Practice," EconStor Preprints 169432, ZBW - Leibniz Information Centre for Economics.
    19. Katrin Weiskirchner-Merten, 2020. "Interdependence, participation, and coordination in the budgeting process," Business Research, Springer;German Academic Association for Business Research, vol. 13(1), pages 247-274, April.
    20. Church, Bryan K. & Kuang, Xi (Jason) & Liu, Yuebing (Sarah), 2019. "The effects of measurement basis and slack benefits on honesty in budget reporting," Accounting, Organizations and Society, Elsevier, vol. 72(C), pages 74-84.

    More about this item

    Keywords

    Capital budgeting; Multi-agent; Information asymmetry; Internal control;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:jmgtco:v:32:y:2021:i:2:d:10.1007_s00187-020-00311-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.