Does Involving Managers in Budgets Lead to More Pessimistic Forecasts?

Summary

This study examines whether letting lower-level managers actively participate in setting budgets affects how top managers forecast company earnings to outsiders. Budgets are supposed to improve planning because frontline managers have detailed operational knowledge. But participation can also encourage “budgetary slack”—understating expected revenue or overstating costs—so targets are easier to hit. The authors test whether this slack leads top managers to issue overly pessimistic earnings forecasts (i.e., lower than would reasonably be expected).