Linkage of budgetary slack to discretionary accruals and the measurements and determinants of budgetary slack: the empirical evidence of listed companies in Thailand

Abstract

This study firstly, investigates the linkage of budgetary slack to discretionary accruals as a result of earnings management; secondly, introduces and objective measurement of budgetary slack based ex post measure of firm's annual budget achievability with the exclusion of earnings mansgement through discretionary accruals rather than the traditional subjective measurement based on management's peperceptions; and thirdly, empirically examines the association between budgetary slack and its determinants under various budgerary slack measurements. This study uses primary data from survey questionnaires and data from the annual financial statements for the year ended 2009 of listed non-financial and ono-rehabilitation companies in Thailand. The respondents are those who are at the corporate level. The population covers 387 firms and there are 38 returned and usable questionnaires which is 10% response rate. The results reveal that firms choose to manipulate earnungs through discretionary accruals and create slack into budgets. The means of discretionary accruals are significantly different among groups. However, there is no statistical evidence that the means of budgetary slack of each subsample group are different. There is a linkage of budgetary slack to discretionary accruals. Firms that incorporated slack into budgets and already achieved their annual earnings targets are more likely to manipulate earnings downward in order to reserve the excess earnings and/or not to exceed the targets by too much witch affect the budget setting in the next period. Althrough the objective measurement of budgetary slack is statistically found to be positively related to the traditional subjective measurement, the suggested objective measurement is considered to be a superior one. Moreover, the association between budgetary slack and its determinants is relatively sensitive to the measurements of budgetary slack.