The effects of procedural justice and evaluative styles on the relationship between budgetary participation and performance

THE EFFECTS OF PROCEDURAL JUSTICE AND EVALUATIVE STYLES ON THE RELATIONSHIP BETWEEN BUDGETARY PARTICIPATION AND PERFORMANCE Chong M . Lau and Edmond W . Lim

ABSTRACT Prior studies suggest that budgetary participation is important to those subordinates who are evaluated by a high budget emphasis evaluative style . It enables them to influence their budget targets . This study, however, proposes that budgetary participation is needed only if subordinates perceive their organizations' performance evaluation and reward allocation systems as unfair . In such situations, budgetary participation may be useful for communicating grievances and for rectifying unfairness . This suggests that budgetary participation may be more effective in enhancing managerial performance when procedural justice is low than when it is high . These expectations are supported by the results of the study .

INTRODUCTION Much research has been undertaken on the relationships between supervisory evaluative style (budget emphasis) and subordinates' behavior and performance Advances in Accounting, Volume 19, pages 139-160 . Copyright © 2002 by Elsevier Science Ltd. All rights of reproduction in any form reserved . ISBN : 0-7623-0871-0 139



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(Kren & Liao, 1988 ; Briers & Hirst, 1990 ; Lindsay & Ehrenberg, 1993 ; Otley & Fakiolas, 2000) . The continuing stream of studies in this area and the related area of budgetary participation has resulted in what Brownell and Dunk (1991, p. 703) regard as "the only organized critical mass of empirical work in management accounting", and what Lindsay and Ehrenberg (1993, p . 223) considered as "one of the relatively few areas in management accounting research where there has been any sequence of repeated studies" . Continuous research in these two related areas is not surprising, considering the importance of budgets and budgetary participation in the planning, control and performance evaluation systems of most contemporary organizations (Otley, 1999) . Hence, there is strong justification to continue to extend the research in these areas . Prior studies on evaluative styles suggest that if subordinates are evaluated by a high budget emphasis evaluative style, they should be allowed high budgetary participation before improvement in performance is attainable (Brownell, 1982 ; Brownell & Dunk, 1991 ; Lau et al ., 1995) . This study proposes that procedural justice may affect this relationship among budget emphasis, participation and managerial performance . Specifically, it examines if the positive effect of budgetary participation on managerial performance in a high budget emphasis situation is conditional upon the extent of procedural justice . Additionally, it investigates if these moderating effects are found only in the high budget emphasis situation and not in the low budget emphasis situation . This suggests the existence of a significant three-way interaction among budget emphasis, participation and procedural justice affecting managerial performance . This research is consistent with the stream of research which indicates that the effects of supervisory evaluative style (budget emphasis) on subordinates' behavior and performance are contingent upon a number of moderating variables . These include budgetary participation (Brownell, 1982), task uncertainty (Hirst, 1981, 1983), environment uncertainty (Govindarajan, 1984), business strategy (Govindarajan & Gupta, 1985), participation and task uncertainty (Brownell & Hirst, 1986), participation and task difficulty (Brownell & Dunk, 1991), locus of control (Frucot & Shearon, 1991), national culture (Harrison, 1992), personality (Harrison, 1993) and interpersonal trust (Ross, 1994) . However, omitted from these studies is the moderating effect of procedural justice . Folger and Konovsky (1989) defined procedural justice as the perceived fairness of the means used to determine the amounts of reward the employees receive. It encompasses the employees' perceptions of the fairness of all aspects of the organization's process used by their superiors to evaluate their performance, communicate performance feedback and determine their rewards such as promotions and pay increases . The theoretical framework for research



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on procedural justice is based on prior research in the legal and psychology disciplines . The early work of Thibaut and Walker (1975), which focused on process control and outcome as the key variables affecting procedural justice, led to much research on the impact of these two factors on procedural justice judgments in legal settings . However, this seminal work of Thibaut and Walker (1975) was challenged by Leventhal (Leventhal, 1980 ; Leventhal et al ., 1980) as being too restrictive in defining fairness criteria. According to him, apart from process control, there are other fairness criteria such as consistency, bias suppression, accuracy of information, correctability and ethicality . Greenberg and Folger (1983) also found the relationship between procedural justice and participation to be complex . Additional subsequent research also found both procedural justice and participation to be important moderating variables (e .g . McFarlin & Sweeney, 1992) . With respect to management accounting, Lindquist (1995) found that process control (vote or voice) interacted with the fairness of budget (attainable or unattainable) to affect task and budget satisfaction . Libby (1999) found a significant interaction between participation (voice) and explanation affecting performance . These results, together with those of other studies, have led Lind and Tyler (1988, p . 175) to conclude that "procedural justice does affect performance, sometimes in a straightforward fashion and sometimes not" . In particular, they suggest that the organization's performance evaluation systems, participatory programs and the subordinates' perceptions of procedural justice are intricately linked to affect the subordinates' behavior and performance . This provides the motivation and theoretical justification for the present study to examine if procedural justice interacts with budgetary participation and budget emphasis to affect the subordinates' performance . Specifically, it investigates if the effects of budgetary participation on the subordinates' performance are stronger when procedural justice is low than when it is high . It also investigates if these effects are confined only to the high budget emphasis situation . This suggests a threeway interaction among budgetary participation, procedural justice and budget emphasis affecting managerial performance . To-date, these relationships have not been previously explored . Figure 1 presents the model used to investigate these relationships .

HYPOTHESIS DEVELOPMENT Concept of Procedural Justice

Early research on procedural justice was based primarily on dispute resolution in law . Based on such research, Thibaut and Walker (1978) generated a theory



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Procedural justice

Budgetary participation

Managerial performance

Budget emphasis Fig. 1 .

Three-Way Interaction Among Participation, Procedural Justice and Budget Emphasis Affecting Performance .

which advocated that, for disputes involving strong conflicting interests, procedures which are in accordance with societal definitions of fairness, rather than objective criteria of fairness, should be used . This theory is important because it acknowledges that there are different criteria of fairness and that different procedures are needed to settle different types of dispute . But because the theory was based on the early research findings in legal setting, and since such research was primarily preoccupied with the effects of voice in dispute resolution, it had relatively restricted standard of fairness . Leventhal's theory (Leventhal, 1980 ; Leventhal et al ., 1980) extended the theory of Thibaut and Walker by suggesting that there are other standards of fairness besides outcome . These are consistency, bias suppression, accuracy of information, correctability, ethicality and representativeness . Consistency refers to the consistency in the application of procedures across persons and across time . Bias suppression refers to suppression of prior beliefs and doctrines in the application of procedures . Accuracy of information suggests that procedures should lead to decisions which are based on accurate information . Correctability means that there are avenues for correcting bad decisions . Ethicality suggests that procedures should conform to some standards of ethics and morality . Finally, representativeness suggests that the interests of subgroups should be considered . Leventhal's theory is important because it does not restrict procedural justice to only the possible effects of participation and outcome . Participation is only one of the myriad of organizational factors which could influence the



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subordinates' perceptions of procedural justice . Many other procedural justice criteria (e .g . consistency of application, accuracy of information) and the structural components of the organizational procedures (e .g . selecting agents to gather information, setting ground rules) may also influence procedural justice . Subsequent research also indicated that the weights assigned to different fairness criteria might vary across situations (Lind & Tyler, 1988) . This means that procedural justice could be high even if participation is low, if other features of the procedures induce perception of high procedural justice . Similarly, procedural justice may be perceived as low even if participation is high if subordinates regard other justice criteria as more important than participation . For instance, Fry and Leventhal (1979) found that inconsistency in setting ground rules was regarded as a much more serious violation of procedural justice than representativeness (participation) . Hence, in situations where the consistency criterion is violated, subordinates may perceive procedural justice as low even if participation is high . Procedural justice is therefore a different and a much broader concept and construct than participation . Participation, Budget Emphasis and the Role of Procedural Justice Hopwood (1972) suggested that a high reliance on accounting performance measures such as budget targets by superiors to evaluate their subordinates (high budget emphasis) may be associated with high job-related tension, dysfunctional behavior and poor job performance . Brownell (1982), however, suggested that budgetary participation might moderate the relationship between budget emphasis and managerial performance . Based on the principle of operant conditioning and balance theory, he theorized and found that a match between high (low) budget emphasis and high (low) budgetary participation is crucial for beneficial behavioral outcomes to occur . Hence, the organization's interest is best served if subordinates, who are evaluated with a high budget emphasis evaluative style, are allowed high budgetary participation, whilst subordinates evaluated with a low budget emphasis evaluative style are allowed only low budgetary participation . A number of subsequent studies extended the research of Brownell (1982) by the inclusion of other moderating variables or other dependent variables . These include Hirst (1983) who studied the interaction between task uncertainty and budget emphasis ; Brownell and Hirst (1986) who hypothesized and found a significant three-way interaction among budget emphasis, participation and task uncertainty affecting job-related tension ; and Mia (1989) who addressed the interaction between task difficulty and budgetary participation . Several subsequent studies also provide further extensions (e .g. Dunk, 1989, 1990, 1993 ;



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Brownell & Dunk, 1991 ; Frucot & Shearon, 1991 ; Harrison, 1992, 1993 ; Lau et al ., 1995 ; Lindquist, 1995) . These studies, together with those related to procedural justice mentioned previously, provide the basis for the present study to propose that procedural justice is also likely to affect the interaction between budgetary participation and budget emphasis affecting managerial performance .

High Budget Emphasis Situations The proposition that high budgetary participation is needed in high budget emphasis situations before favorable behavioral outcomes are possible (Brownell, 1982) implies that subordinates may feel disadvantaged if they are not allowed to participate in the budget target setting process . Subordinates may feel disadvantaged because they are deprived of the opportunities offered by budgetary participation to communicate their opinions and arguments to their superiors to ensure favorable outcomes . These assumptions may not always be true because the subordinates' need for high budgetary participation in high budget emphasis situations is likely to be conditional upon their perceptions of procedural justice . As discussed previously, procedural justice literature suggests that, apart from budgetary participation, many other organizational factors could also influence the subordinates' perception of procedural justice (Leventhal, 1980 ; Lind & Tyler, 1988). Hence, procedural justice could be high on account of factors such as consistency of application, bias suppression, accuracy of information, correctability and ethicality . If subordinates perceive procedural justice as high, meaning that they regard the process of allocation and determining their rewards as fair, budgetary participation may be unimportant because it is not needed to voice resentment or to rectify the process of allocation since it is already perceived to be fair . Second, it is also not needed to clarify the evaluative style and criteria because evaluative styles based on accounting information are relatively objective and unambiguous . Hopwood (1972, p . 173) found that subordinates have greater trust in evaluative styles based on accounting based criteria than nonaccounting styles . This means that in high budget emphasis situations,

budgetary participation is likely to have little or no effects on performance when procedural justice is high . In contrast, if subordinates perceive procedural justice as low, there is likely to be a greater need for budgetary participation to ameliorate discontent and to remedy the unfair process. Budgetary participation provides the opportunity for the subordinates and their superior to communicate with each other, for the subordinates to voice their concerns regarding the unjustness of the procedures (Lindquist, 1995) and for the superior to provide explanation for the unjust process (Libby, 1999) . This may help to appease and alleviate the



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resentment associated with low procedural justice and assist in aligning the subordinates' interest with that of the organization . Libby (1999) found that consultative participation enhanced performance even if ultimately the superiors imposed unfair and unattainable budget targets, provided explanation for the unfair and imposed budgets are given to the subordinates . Similarly, Lindquist (1995) found that consultative participation enhanced budget satisfaction even if ultimately unfair and unattainable budget targets were set by the superiors and the subordinates' preferences were not acceded to . Finally, Thibaut and Walker (1975) suggest that allowing individuals to voice their opinions enhances their satisfaction even though the ultimate outcomes may not be in the individuals' favor . The above therefore suggests that

budgetary participation is important to the subordinates if procedural justice is perceived by them to be low . Based on the above discussion, it is possible to conclude that budgetary participation is likely to have a stronger impact on performance when procedural justice is low than when procedural justice is high . This means that,

when budget emphasis is high, there is likely to be a significant two-way interaction between budgetary participation and procedural justice affecting managerial performance . Since the impact of participation on managerial

high for low procedural justice and low for high a negative interaction is expected . The following hypothesis

performance is expected to be procedural justice, is therefore tested :

H1 : In high budget emphasis situations, there is a significant and negative two-way interaction between budgetary participation and procedural justice affecting managerial performance . Budgetary participation is more effective in enhancing managerial performance in low procedural justice situations than in high procedural justice situations .

Low Budget Emphasis Situations In a low budget emphasis situation, subordinates are likely to be evaluated by multiple nonaccounting criteria, such as concern with quality, ability to get along with superiors and ability to handle the work force . Even though the recent interest in nonfinancial performance indicators (Kaplan, 1983 ; Kaplan & Norton, 1996) have led to the development of quantifiable nonfinancial performance criteria, these criteria are still likely to be much more subjective and ambiguous than accounting-based performance measures because nonfinancial criteria are generally much harder to quantify . In addition, with nonaccounting criteria, subordinates are usually required to satisfy more than one criterion (Kaplan & Norton, 1996), which therefore involves arbitrary assignment of



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weights to the different criteria . Thus, there is likely to be a higher degree of subjectivity and ambiguity associated with a low budget emphasis evaluative style than a high budget emphasis evaluative style . Hopwood (1972, p . 174) considered a nonaccounting evaluative style as ambiguous and characterized it as "rather vague . . . surrounded by a great deal of uncertainty . . . is difficult to clearly specify what constitutes good and bad performance, and . . . difficult to determine when improvement occurs ." Similarly, Ross (1994, p . 630) described a low budget emphasis evaluative style as "somewhat subjective . . . ambiguous and difficult to measure" and are subject to "a superior's biases and idiosyncrasies" . In view of the subjectivity and ambiguity associated with a low budget emphasis evaluative style, budgetary participation may serve as an important avenue for the subordinates to seek information and clarification on performance evaluation criteria . This means that budgetary participation is likely to be important in low budget emphasis situation, regardless of the levels of procedural justice . Consequently, the significant two-way interaction between procedural justice and participation affecting managerial performance, predicted above for the high budget emphasis situation, is unlikely to be found in the low budget emphasis situation . The following hypothesis is therefore tested : H2 : In low budget emphasis situations, budgetary participation and procedural justice do not interact to affect managerial performance .

METHOD The data collection involved a survey questionnaire . Seventy manufacturing companies, each employing more than 100 employees, were randomly chosen from the list of manufacturing companies published in Kompass Australia (1997) . Questionnaires were mailed to 200 functional heads . A follow-up letter was sent to each manager who had not responded after three weeks . Seventeen managers indicated that their companies were no longer involved in manufacturing and hence were removed from the sample . Of the remaining 183 questionnaires, a total of 85 were returned . Two responses were excluded from the study due to the failure of the respondents to complete the whole questionnaire . Hence, the remaining 83 useable responses constitute a response rate of 45 .4% . In order to ascertain whether a non-response bias existed, a t-test was undertaken for each of the variables used in this study by splitting the sample into two halves, the first half comprising the earliest 50% responses and the



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second half comprising the latest 50% responses received . Oppenheim (1966) suggested the possibility that similarity exists between respondents who reply late and non-respondents . If later responses differ significantly from earlier ones, it can be concluded that non-response bias may be present . As no significant differences were found for any of the variables in this study, it can be concluded that the sample was not biased by non-responses . The mean age of the respondents was 46 .2 years and the respondents had held their current positions for an average of 5 .7 years . On average, the respondents had 14 .5 years of experience in their area of responsibility and were responsible for 112 employees . Sixty one percent of them had either tertiary or professional qualifications . These data indicate that the respondents were highly experienced, held highly responsible positions and generally highly educated and qualified . Table 1 presents the descriptive statistics for the independent variables of budget emphasis, budgetary participation and procedural justice, and the dependent variable of managerial performance . The Pearson Correlation Matrix of budgetary participation, procedural justice, budget emphasis and managerial performance is presented in Table 2 . Table 1. Variables Budget emphasis Budgetary participation Procedural justice Performance

Table 2.

Mean

Standard deviation

12 .0964 33 .9036 14 .9518 5 .9036

1 .9731 7 .2509 3 .1231 0 .7261

Theoretical range Min Max 2 6 4 1

14 42 20 7

Actual range Min Max 5 6 4 4

14 42 20 7

Correlation Matrix Among Independent and Dependent Variables .

Budgetary Participation Procedural Justice Managerial Performance *p<0.05 ** p < 0 .01 .

Descriptive Statistics .

Budget Emphasis

Budgetary Participation

Procedural Justice

0 .225* 0.254* 0 .126

0 .297** 0 .445**

0 .267*



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MEASUREMENT INSTRUMENTS Budgetary participation . This variable was measured using a six-item, sevenpoint Likert-type scale instrument developed by Milani (1975) . This construct assesses the degree of subordinates' participation in the budget and includes several aspects of participation - involvement, superior's explanation for changes, frequency, influence, and importance of subordinates' inputs . This instrument had been used extensively in studies on budgetary participation (e .g . Brownell, 1982 ; Brownell & Hirst, 1986 ; Chenhall & Brownell, 1988 ; Mia 1989 ; Brownell & Dunk, 1991 ; Harrison, 1992, 1993) and they had consistently reported high Cronbach alpha values . The Cronbach alpha for this study was 0.90, indicating high internal reliability . All six items also loaded satisfactory on a single factor (Eigenvalue = 4 .086 ; Total variance explained = 68 .10%) . Procedural justice . The four-item instrument developed by McFarlin and Sweeney (1992) was employed to measure the subordinates' perceptions of procedural justice . Respondents were requested to rate the fairness of the procedures used to evaluate their performance, communicate performance feedback, and determine their pay increases and promotion, on a five-point Likert scale . An overall measure of procedural justice was obtained by summing up responses to the four individual items . A Cronbach alpha of 0 .89 was obtained for this study, which is comparable to the 0 .88 obtained by McFarlin and Sweeny (1992) . The factor analysis extracted only one factor with an eigenvalue greater of than one (Eigenvalue = 3 .024 ; Total variance explained = 75 .60%) . This supports the unidimension of this instrument . Budget emphasis . In assessing budget emphasis, Hopwood's (1972) instrument was used. This instrument has been widely employed in this research area (Otley, 1978 ; Brownell, 1982 ; Brownell & Hirst, 1986 ; Brownell & Dunk, 1991 ; Harrison, 1992 ; Lau & Buckland, 2000) . Only the two accounting based items of "concern with costs" and "meeting the budget" were combined to obtain the overall score for budget emphasis . The use of the rating form and the summing of these two items permit budget emphasis to be operationalized "along a continuum from accounting to non-accounting style of evaluation" (Brownell & Dunk, 1991, p . 702) . A high combined score indicates high budget emphasis while a low combined score represents low budget emphasis . Brownell (1985) argued that it is justifiable to sum these two items if they are highly correlated . For this study, these two items have a relatively high coefficient of correlation of 0.56 (p < 0 .01) .



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Managerial performance . Managerial performance was evaluated by the ninedimensional Mahoney et al . (1963, 1965) self-rating measure used extensively by many prior studies (e .g . Brownell, 1982 ; Brownell & Hirst, 1986 ; Brownell & McInnes, 1986 ; Brownell & Dunk, 1991 ; Kren, 1992 ; Lau et al ., 1995 ; Lau & Tan, 1998) . This measure comprises eight dimensions of performance and a single overall performance rating . Brownell (1982, pp . 17-18) argued that "the nine-dimensional structure of the measure clearly captures the multidimensional nature of performance without introducing the problem of excessive dimensionality" . In line with prior studies, the overall performance rating was used as a measure of managerial performance . In their developmental work, Mahoney et al . (1963, 1965) concluded that the eight dimensions of the performance measure should be independent and explain about 55% of the variance in the overall rating, while the remaining 45% was attributed to job-specific factors . To test for this criterion, the overall rating is regressed on the ratings of the eight dimensions . The regression provided a coefficient of determination of 0 .52 (p = 0 .001) which is close to the 0 .55 suggested by Mahoney et al . (1963, 1965) . Consequently, the overall measure was used in the analysis as the measure of managerial performance .

RESULTS AND DISCUSSION Test of Hypotheses HI : High Budget Emphasis Situations Recall that hypothesis H1 relates to the high budget emphasis situations and, hypothesis H2 relates to the low budget emphasis situations . In order to test these two hypotheses, budget emphasis was dichotomized at its mean to obtain a high budget emphasis subsample of 41 respondents and a low budget emphasis subsample of 42 respondents . The approach of dichotomizing the sample with the mean is consistent with a number of prior studies (e .g . Dunk, 1993 ; Lau et al ., 1995 ; Nouri & Parker, 1996) . Moreover, as the means of the variables in this study are very close to the medians, the results of this study based on the means are also similar to those based on the medians . Regression models were used to test the hypotheses . To analyze the main effects and the two-way interactive effect between participation and procedural justice in each of the low and high budget emphasis situations, the following regression models were used : Y.=co +c I Pi +c 2J.+el

(1)

Yi = c0 + c I PI + c 2J1 + c 3PA + e i

(2)



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where Y 1 = managerial performance, Pi = budgetary participation, J, = procedural justice and e 1 = error term . Equations (1) and (2) were used to analyze the main effects and the two-way interaction effect, respectively . Tests undertaken indicate that the inherent assumptions of the regression models used in this study were satisfied . The results of the main effects Eq . (1) and the two-way interaction Eq . (2) between participation and procedural justice for the high budget emphasis subsample are presented in Table 3 . As expected, the results indicate that the coefficient c 3 for the two-way interaction between participation and procedural justice on managerial performance is significant (est. = -0 .015 ; p < 0 .022) . The R2 of the interactive model is 28 .1%, which is considerably higher than that of the additive model (19 .7%) . A comparison of Eq . (1) and Eq. (2) shows that the introduction of the interaction term causes the adjusted R2 to increase by 6 .9% from 15 .4% to 22 .3% . These results provide support for hypothesis H1, that participation interacts with procedural justice to affect managerial performance in high budget emphasis situations . In addition, these results are also consistent with the expectation that high procedural justice is associated with improved managerial performance in high budget emphasis situations . This is evidenced from coefficient c 2 for procedural justice, which is positive and significant (est . = 0 .064 ; p < 0 .028 ; Eq . (1)) . The results in Eq . (2) do not indicate whether participation contributes positively to managerial performance across all level of procedural justice as "merely inspecting the signs and magnitudes of regression coefficients is Table 3. Results of Regression of Managerial Performance on Budgetary Participation and Procedural Justice : High Budget Emphasis Subsample (n = 41) .

Variable Constant Budgetary participation (P) Procedural justice (J) PXJ

Coeff. co ci c2 c,

Equation (1) (main) Est. P 3 .699 0 .037 0 .064

0.001 0.025 0.028 Equation (1)

R2

Adjusted R 2 F value P < Adjusted R 2 explained by interaction term =

0.197 0.154 4 .653 0.008

Equation (2) (2-way) Est . P -3 .961 0 .258 0 .570 -0 .015

0 .149 0 .011 0 .013 0 .022 Equation (2) 0 .281 0 .223 4 .820 0 .003 6 .9%



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insufficient analysis for contingency hypotheses" (Schoonhoven, 1981, p . 2) . To ascertain whether non-monotonicity effect exists, the test for monotonicity suggested by Schoonhoven (1981) was employed . The partial derivative of Eq . (2) was computed as : dY i / dP, = c, + c 3J1 Eq . (3) . If dY . / dP1 is always positive or negative across the entire range of procedural justice, the relationship between managerial performance and participation is considered monotonic . This can be examined by calculating the point of inflexion by equating Eq . (3) to zero . Hence, the point of inflexion is calculated as -c I / c 3 (-0 .258 / -0 .015) which is 17 .2 . As the observed range of procedural justice scores is from 4 to 20 (see Table 1), this point of inflexion lies within the observed range and is close to the mean score of 14 .95 . Hence, it can be concluded that participation has a nonmonotonic effect on managerial performance across the entire observed range of procedural justice . This implies that the effect of budgetary participation on managerial performance is positive for procedural justice scores below 17 .2 and negative for scores above 17 .2 . In other words, the lower the level of procedural justice, the stronger the positive impact of budgetary participation on managerial performance . A graphical representation of the results is presented in Fig . 2 . These results provide further support for hypothesis H1 . In conclusion, hypothesis H1, which states that in high budget emphasis situations, there is a significant and negative two-way interaction between budgetary participation and procedural justice affecting managerial performance, is supported . The negative coefficient c 3 for the dY/dJi 0 .3 dY/dPi = 0 .258 - 0.015 Ji

0 .2 0 .1 -

Procedural 0

justice (Ji)

1

1

4

17

20

0 .1 0 .2 Fig. 2 .

Relationship of Budgetary Participation, Procedural Justice and Managerial Performance : High Budget Emphasis Subsample .



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two-way interaction term also provides support for the expectation that budgetary participation is more effective in enhancing managerial performance in low procedural justice situations than in high procedural justice situations . Test of Hypotheses H2: Low Budget Emphasis Situations Table 4 presents the results of the main effects Eq . (1) and the two-way interaction Eq . (2) between participation and procedural justice for the low budget emphasis subsample . Hypothesis H2 states that in low budget emphasis situations, budgetary participation and procedural justice do not interact to affect managerial performance . This is supported by the non-significant result for coefficient c 3 (est . = -0.001 ; p < 0 .463) and the value of R2 obtained for both the main and the interaction models, which is 22 .9% for both models . Furthermore, the introduction of the interaction term in Eq. (2) led to a decrease in the adjusted R2 of 2 .1% . Thus, hypothesis H2 is supported . Further Analysis of the Two-Way Interaction Model To assist in the interpretation of the results presented in Tables 3 and 4 for Eq . (2), graphs of regression lines were plotted and presented in Figure 3 for the Table 4. Results of Regression of Managerial Performance on Budgetary Participation and Procedural Justice : Low Budget Emphasis Subsample (n = 42) .

Variable Constant Budgetary participation (P) Procedural justice (J) PX J

R2

Adjusted R2 F value P < Adjusted R2 explained by interaction term =

Coeff. co ci c2 c3

Equation (1) (main) Est . P 4 .386 0 .044 -0 .007

0.000 0.002 0.492

Equation (2) (2-way) Est. P 4.188 0.050 0.015 -0.001

0.033 0.225 0.466 0.463

Equation (1)

Equation (2)

0.229 0.189 5 .789 0.003

0.229 0.168 3 .764 0.009

-2.1%



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high budget emphasis subsample, and Fig . 4 for the low budget emphasis subsample . Each graph presents two regression lines, one for high procedural justice, based on the regression equation for high procedural justice, and another for low procedural justice, based on the regression equation for low procedural justice . It indicates graphically how the relationship between budgetary participation and managerial performance differs between high procedural justice and low procedural justice .

PJ = Procedural justice Fig . 3 .

Two-way Interaction Between Participation and Procedural Justice Affecting Performance (High Budget Emphasis Subsample ; N = 41) .



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Performance 6 .29 6

5 4.57 4

3

2 I

I

Low

High Participation

PJ = Procedural justice Fig . 4.

Two-way Interaction Between Participation and Procedural Justice Affecting Performance (Low Budget Emphasis Subsample ; n = 42) .

High Budget Emphasis Subsample For the high budget emphasis subsample, Table 3 indicates that coefficient c 3 for the two-way interaction between participation and procedural justice is significant (p < 0 .022) . Since this coefficient is significant only if the slopes of the two regression lines are significantly different (Cohen & Cohen, 1983, p . 16), the significant result found in Table 3 for coefficient c 3 (p < 0 .022) provides the statistical support that the slopes of the two regression lines in Fig . 3 are



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significantly different . This is supported by additional computation which indicates that the slopes of the two regression lines are significantly different (p < 0 .06) . They also indicate that for the high procedural justice subsample, the effect of participation on managerial performance is not significant (p < 0 .215) . In contract, for the low procedural justice subsample, the effect of participation on managerial performance is highly significant (p < 0 .008) . Figure 3 also indicates that the relationship between budgetary participation and managerial performance is less positive for high procedural justice than for low procedural justice . This indicates the existence of a negative interaction and is consistent with the results in Table 3, which indicates that the two-way interaction coefficient c 3 is both significant and negative (est = -0 .015) . Overall, these results provide support for Hypothesis H1, which states that budgetary participation is more effective in enhancing managerial performance in low procedural justice situation than in high procedural justice situation . Low Budget Emphasis Situations Figure 4 presents graphically the results for the low budget emphasis subsample . It indicates that the slope of the high procedural justice regression line is not statistically different from that for the low procedural justice regression line (p < 0.363) . This is consistent with the results in Table 4, which indicate that coefficient c 3 for the two way interaction between budgetary participation and procedural justice is not significant (p < 0 .463) . This means that the relationship between budgetary participation and managerial performance does not differ significantly between high procedural justice and low procedural justice in low budget emphasis situations . Hypothesis H2, which states that in low budget emphasis situations, there is no significant interaction between budgetary participation and procedural justice affecting managerial performance, is therefore supported . Three-way Interaction Test To provide further statistical support for the expectation that the results for the high budget emphasis situation is significantly different from those for the low budget emphasis situation, the following model, involving a three-way interaction among budget emphasis, participation and procedural justice affecting managerial performance, was used :

P

Yi = b o + b 1 B 1 + b,Pi + b 3J i + b4BP + b 5 B JA + b 6P .J. + b 7 B 1 J . + e 1

(4)

where Y, = managerial performance, B i = budget emphasis, P i = budgetary participation, J i = procedural justice and e i = error term .



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Table 5. Results of Regression of Managerial Performance on Budget Emphasis, Budgetary Participation and Procedural Justice (n = 83) . Equation (4) Variable Constant Budget emphasis (B) Participation (P) Procedural justice (J) B x P B x J PXJ B x P x J

Coeff

Est.

P

b0 bi b2 b3 b4 bs b6 b7

31 .994 -2.489 -0.696 -2 .306 0.066 0.204 0.063 -0 .005

0 .010 0 .018 0 .048 0 .011 0 .034 0 .009 0 .020 0 .016 Equation (4) 0 .313 0 .249 4.878 0.001

R2

Adjusted F value P <

R2

If the results for the high budget emphasis situation are significantly different from those for the low budget emphasis situation, the coefficient of the threeway interaction term, b 7 , would be statistically significant . The results in Table 5 indicate that coefficient b 7 of the three-way interaction term is significant (p < 0 .016) and that the model as a whole explains 31 .3% (R2 ) of the variation in managerial performance . These results provide further statistical support for hypotheses H1 and H2 that the significant two-way interaction between budget emphasis and budgetary participation affecting managerial performance exists for the high budget emphasis situation, but not for the low budget emphasis situation .

CONCLUSIONS Studies on supervisory evaluative styles have often stressed the importance of subordinate's budgetary participation for enhancing managerial performance . Specifically, researchers have argued that in high budget emphasis situations, high budgetary participation is needed before improvements in performance are attainable (Brownell, 1982) . This study, however, proposes that the subordinates' perceptions of procedural justice may influence the effectiveness, and therefore the need to participate in the budget setting process . Specifically, for those subordinates, who perceive procedural justice to be high, high budgetary



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participation may not be an important factor for enhancing their performance . In contrast, for those subordinates, who perceive procedural justice to be low, high budgetary participation may be a crucial factor for enhancing their performance . These expectations are supported by the results of this study, which indicate a significant and negative two-way interaction between procedural justice and participation affecting managerial performance for the high budget emphasis situation . The results also indicate that these effects are not generalizable to the low budget emphasis situation . These results may have important implications . From a practical perspective, they may assist top management in the design and implementation of more effective and efficient control systems . Since the subordinates' involvement in the budget setting process may be a costly and time consuming process, it should be encouraged and allowed only in those situations where the subordinates' involvement is beneficial to the organization . Since the results of this study indicate that budgetary participation may not be crucial in the high budget emphasis - high procedural justice situations, subordinates' participation in such situations may be reduced or even eliminated without seriously jeopardizing the organization performance . This may not only save time for both the subordinates and their superiors because of the elimination of time consuming negotiation, but may also enable budgets to be completed within a much shorter time . Additionally, the realization that high procedural justice reduces the need for high budgetary participation may encourage top management to adopt fairer organizational procedures as a substitute for high budgetary participation . As with other empirical studies, there are limitations associated with this study. First, there are the limitations associated with the survey questionnaire method . Second, as this study has concentrated solely on the manufacturing sector, generalizing the results to other industries should be done with caution . Similarly, generalizing the results to other levels of management should also be done with caution . Further studies, which extend this research to other levels of management and other industries, may be worthwhile . Finally, omitted variables may have affected the results of this study . Notwithstanding the aforementioned limitations, this study extends the research of prior studies on procedural justice to the important area of supervisory evaluative styles by incorporating and systematically evaluating the effects of procedural justice in the performance evaluative style model . Along with those of other studies (e .g . Lindquist, 1995 ; Libby, 1999), which have explored the effects of procedural justice in management accounting issues, the results of this study may provide insights into the important role of procedural justice in management accounting . Considering the richness of procedural justice research in the legal and psychology disciplines, it is surprising that there are so few studies



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in management accounting research which incorporate systematic evaluations of procedural justice . According to Lind and Tyler (1988, p . 175), "the variability of organizational procedures makes organizations an exciting context for study and analysis ." Many opportunities therefore exist in management accounting for researchers to explore this interesting, and exciting area of research .

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