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


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.


Capital budgeting Organizational structure Informal management control systems Norm enforcement 

JEL Classification

D02 D03 D82 M40 M55 



This paper has benefited from helpful comments from Wendy Bailey, Ramji Balakrishnan, Sudipta Basu, Jake Birnberg, Rob Bloomfield, Russ Coff, Christine Denison, Doug Dejong, Harry Evans, Annie Farrell, Joe Fisher, Jennifer Francis, Jon Glover, Jeff Hales, Gary Hecht, Susan Kulp, Joe Labianca, Bob Libby, Theresa Libby, Joan Luft, Michael Maher, Laureen Maines, Brian Mittendorf, Don Moser, Charles Noussair, Grace Pownall, Tatiana Sandino, Richard Sansing, Lisa Sedor, Frank Selto, Naomi Soderstrom, Margaret Shackell-Dowell, Geoff Sprinkle, Rick Tubbs, Wim Van der Stede, Sandra Vera-Munoz, Greg Waymire, Sally Widener, Michael Williamson, workshop participants at Erasmus University, Indiana University, Rice University, University of Colorado, University of Connecticut, University of Iowa, University of Notre Dame, University of Pittsburgh, University of South Carolina, University of Southern California, and College of William and Mary, and participants at the 2009 RAST conference, particularly our discussant Rick Young. We thank Seth Pratt for writing the computer program, and the WWMA for support.


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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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