The Effect of a Leader's Reputation on Budgetary Slack

© 2015 Emerald Group Publishing Limited. Purpose - This paper examines the effectiveness of the reliance on a leader's reputation as an informal control tool to mitigate subordinates' budgetary slack. In addition, it seeks to explain whether this relationship is mediated by subordinates' truthfulness in revealing their private information. Methodology/approach - A laboratory experiment was conducted involving 60 undergraduate business students who participated in the experiment. A 1 × 2 between-subjects design was employed for the experimental study. Each subject assumed the role of a production manager responsible for setting a budget target. The experimental task employed involved a simple decoding task adapted from Chow (1983). Findings - The results of this study indicate that budgetary slack is lower when a leader's reputation is favourable than when it is unfavourable. In addition, it is found that subordinates' truthfulness in revealing private information fully mediates the relationship between a leader's reputation and budgetary slack. Originality/value - This paper extends the limited literature on the reliance of informal controls in mitigating budgetary slack by examining a leader's reputation as an informal control. The findings of this study provide important implications for the design of effective management control systems.