Review of Accounting Studies

, Volume 15, Issue 3, pp 503–536 | Cite as

Flattening the organization: the effect of organizational reporting structure on budgeting effectiveness

  • R. Lynn Hannan
  • Frederick W. Rankin
  • Kristy L. Towry
Article

Abstract

This study investigates whether increasing a superior’s span of control improves the effectiveness of the budgeting process. We characterize the superior’s utility function as consisting of utilities for norm enforcement and wealth, leading the superior to reject profitable projects believed to contain excessive slack. We develop theory to predict that superiors become more willing to reject projects as their span of control increases. Further, subordinates anticipate superiors’ behavior and reduce slack as span of control increases. Experimental results are consistent with these predictions. As span of control increases, superiors show a greater willingness to reject projects that they believe contain excessive slack, and subordinates submit budgets with less slack. The net result is that superiors earn more profit per subordinate under an expanded span of control. Our study suggests that increasing span of control can improve the effectiveness of the budgeting process, an important component of most firms’ control environments.

Keywords

Capital budgeting Organizational structure Informal management control systems Norm enforcement 

JEL Classification

D02 D03 D82 M40 M55 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  • R. Lynn Hannan
    • 1
  • Frederick W. Rankin
    • 2
  • Kristy L. Towry
    • 3
  1. 1.J. Mack Robinson College of BusinessGeorgia State UniversityAtlantaUSA
  2. 2.College of BusinessColorado State UniversityFort CollinsUSA
  3. 3.Goizueta Business SchoolEmory UniversityAtlantaUSA

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