The Behavioral Effects of Social Distance and Residual Claim Distribution on Budget Reporting in Hierarchical Organizations

ABSTRACT We experimentally investigate how subordinates’ budget reporting in hierarchical organizations is influenced by social distance between subordinates and their direct manager. Although prior research promotes reducing this social distance to improve cooperation and efficiency, we contend that reduced social distance can differentially influence budget reporting, conditional on the manager’s stake in the residual claim. As predicted, we find through two studies that the effect of reduced social distance changes from increasing subordinates’ honesty to decreasing subordinates’ honesty as the manager’s stake in the residual claim decreases. We also find that subordinates’ concern for the manager’s economic well-being and concern about the manager’s impression of their reporting behavior mediate these results. The implications of our findings for management accounting theory and practice are discussed. Data Availability: Please contact the authors. JEL Classifications: C91; D91; M41.