Top-Down and Bottom-Up Budgeting, Budgetary Slack and Managerial Performance: The Mediating Effects of Social and Economic Exchange Perceptions

In the academic literature on the subject, there is little consistent evidence on the effect of budgetary target setting on managerial slack creation and performance. This may be due to the focus in extant research on a manager’s immediate budgetary setting, rather than an organisation’s wider budgeting system. The aim of this paper is to extend this focus by exploring the differential effects of setting budgetary targets in a top-down or a bottom-up fashion. Based on social exchange theory, we argue and demonstrate that these different styles of budgeting determine managers’ perceptions of the budgeting system mainly as a form of economic exchange or of social exchange, which in turn affects behavioural outcomes. Survey evidence from German managers across 132 firms confirms the predictive power of the top-down and bottom-up typology for managers’ slack creation and performance. It also confirms the predictive importance of whether managers perceive the budgeting system as a form of social exchange or as a form of economic exchange.