A Research On The Impact Of The Reputation And Ratchet On Budgetary Slack

Budget is widely used as a management control tool in almost all organizations, and the budget management is the core content of management control process. However, budget slack is widespread, and a serious impact on the effectiveness of budget management. Agency theory that principal and agent will be based on their own interests to influence the budget preparation and execution because of the information asymmetry in the budget formulation process. Therefore, budget preparation is actually the game process between the principal and the agent. Budget slack is regarded as the agency cost in the hierarchical management controlling, and the cost will be more prominent in the repeated agency relationship. From the principal-agent theory perspective, multi-stage dynamic model should be used if we discuss the role of implicit incentives under the repeated principal-agent relationship. Agent's reputation mechanism helps to eliminate agency costs, thereby inhibiting the organization's budget slack. But ratchet effect increases agency cost, thus stimulating the organization's budget slack.This paper combines reputation mechanism and ratchet by empirical research. Firstly, it verifies the managers'reputation significantly inhibits from budget slack. When budget reliability affects reputation the result will be lower levels of budget slack. Secondly, it verifies budget ratchet has certain stimulative effect on budget slack. When managers are expected to current efforts will improve the indicators of the budget, resulting in their failure to complete the budget,thereby affecting their reward, the possibility of budget slack they creat will be greater. Thirdly, it verifies the co-existence of reputation mechanism and budget ratchet effect will make the possibility of budget slack producing significantly increased. Budget ratchet has recessive incentive effect on budget slack. Managers value not the reliability of the budget influences their reputation, but the budget ratchet effect will bring the risk of uncertain rewards in the future. Risk aversion is an important determinant of budgetary slack. In order to obtain established rewards,managers will try to make budget slack.Finally, according to the empirical results, the paper puts forward related suggestions to the budget management.