Knowledge transfer in project reviews: the effect of self-justification bias and moral hazardMandy M. Chenga, Axel K-D Schulzb, Peter Boothc

Accounting and Finance 49 (2009) 75–93

AbstractIn this study, we examine two factors that impact managers’ willingness to share private information during the project review stage of capital budgeting. Drawing on the cognitive dissonance theory and the agency theory, we find that both high perceived personal responsibility and the use of project reviews for performance evaluation result in a greater tendency for managers to withhold negative private information. However, we do not find an interaction between these two factors. Our study makes a contribution to both the academic literature investigating factors affecting project reviews and the practitioner literature looking at design and implementation of effective project reviews.

1. IntroductionCapital budgeting is one of the key processes undertaken by organizations in planning for the future resource consumption. By its nature, capital budgeting involves decision-making under uncertainty, as organizations chart out a future course of action. The challenge for the organizational control system is to provide a mechanism that provides both feedback and accountability to managers involved in the decision process. Post completion reviews provides one such mechanism (e.g. Langfield-Smith et al., 2006).

According to International Management Accounting Policy Statement 6–Post Completion Review (issued by the International Federation of Accountants, 1994),1 the main purposes of project reviews include organizational learning and improving future decisions/project implementations within the organization. Project reviews allow managers to share/transfer their knowledge gained from the existing project with/to other managers across space and time, and in doing so, improve the efficiency and effectiveness of project management in the future. For example, project managers can report ‘lessons learned’ to a project audit committee, which in turn can use this information to provide training for other project managers either within or outside the organizational unit, or to redesign processes. This view is supported by Busby (1999), who found that project reviews are generally considered to be effective in disseminating knowledge about good practices, and to correct and learn from errors.

However, although project reviews allow managers to transfer and share their information, it does not guarantee the transfer of relevant information, particularly when the information is private and relates to negative financial consequences. In that context, it could also have the opposite effect of hindering the decision process, as managers chose not to share this type of information. We are particularly interested in the context of negative private information as it provides a valuable avenue for organizations to learn from previous mistakes. The focus of our study is to examine two factors that impact on the willingness of managers to pass on this type of information to the project audit committee in order for the organization to make better capital budgeting decisions in the future.

The first factor of interest to our study is the degree of involvement that the manager has with the project under review, such as responsibility for initiating the project and/or length of active management of the project. It is not uncommon that managers, who are involved in managing the project under review, are also involved in the project review process (e.g. Kennedy and Mills, 1992; O’Brien, 1998). Involving these managers can potentially bring in higher levels of project specific knowledge compared to independent reviewers. However, we propose that there are potential negative consequences as self-justification bias will cause the managers to place less emphasis on, or even ignore negative project feedback (e.g. Caldwell and O’Reilly, 1982; Aronson, 1995; Ryan, 1995); hence, reducing the effectiveness of project review as a knowledge transfer tool.

Second, we are interested in the extent to which explicit performance evaluation attached to performance reviews also affect managers’ willingness to transfer knowledge. We argue that where project reviews are used to evaluate managerial performance, a moral hazard problem exists, as managers (acting as agents) are given incentives not to reveal unfavorable private information. Consistent with prior literature, which found that moral hazard is the major driving force of escalation of commitment (e.g. Harrison and Harrell, 1993, 1994; Salter et al., 2004), we propose that moral hazard will affect managers’ decision to share unfavorable information regardless of the degree of prior involvement. We further argue that the degree of personal responsibility and moral hazard have an interactive effect as the motivation to present a more favorable outcome for evaluation purposes further adds to the cognitive bias of self-justification.

Using a laboratory experiment, we find support for the main effects of self-justification bias and moral hazard on the managers’ willingness to share information via the project review process. Both higher degree of personal involvement by the managers and the use of performance review information in performance evaluation separately and significantly decrease managers’ willingness to share information via the review process. This suggests that agency theory does not completely explain managers’ unwillingness to share negative project feedback. Rather, the manager’s self-justification bias also plays an important role. Our results have important practical implications, suggesting that obstacles to knowledge transfer via project reviews can be reduced by either severing the link between the project review process and the organization’s performance evaluation system, and/or the rotation of managers (e.g. via a ‘job rotation’ program where a new manager steps in and takes charge at some point during the life of the project). However, the latter approach potentially leads to a reduction in local knowledge, which might have a negative impact on project performance, especially if the rotation occurs too frequently. Furthermore, it is also difficult to rotate other personnel closely associated with the project. An alternative approach is to lower a manager’s feeling of personal responsibility by sharing the project responsibility among a group of team members.

The results from the present study also contribute to the management accounting research literature in a number of ways. First, prior literature investigating the effect of personal responsibility on managerial decision bias has predominately focused on either agency theory (e.g. Harrison and Harrell, 1993; Harrell and Harrison, 1994) or the effect of self-justification bias (e.g. Staw, 1976; Cheng et al., 2003). Although Schulz and Cheng (2002) attempt to integrate the two frameworks in the context of capital budgeting re-investment decisions, they fail to find a significant moderating role for information asymmetry when managers who are

suffering from self-justification bias escalate their commitment to an unprofitable project. Consistent with their findings, the present study shows that the effect of self-justification and moral hazard are additive and not interactive, both adding separately to managerial biases with respect to unfavorable project information. Second, post-project audits have often been seen as a useful means of preventing escalation of commitment, and to allow learning from past projects (especially poorly performing projects). Our study highlights the risks of biased information feeding into the project audit process due to the separate but additive effects on managers’ tendencies to withhold unfavorable information.

2. Literature review and hypothesis developmentProject review (or project audit) is a feedback system that monitors the progress and/or completion of an investment project by systematically comparing actual performance with budgets and project plans (Kennedy and Mills, 1992; Chenhall and Morris, 1993). Gordon and Myers (1991) find that a large number of organizations conducted some form of project review and the frequency depended on the nature of the project reviewed. Although project reviews have a number of objectives (refer to Gordon and Myers, 1991), the one that is of particular interest to our study is to ‘. . . provide information for future capital expenditure decisions’. In this role, project reviews allow lessons learned from prior projects to be transmitted to existing and future projects, in particular with respect to evaluating future projects (e.g. Chenhall and Morris, 1993; Neale, 1995; Van der Veeken and Wouters, 2002).

However, despite the importance of project reviews, there have been few empirical studies that have considered the benefits of such reviews in general and the effectiveness of knowledge transfer in particular. Prior, predominantly practitioner, literature has been focused instead on the technical aspect of project evaluation, such as surveying the methodology companies used in evaluating project viability (e.g. Ryan and Ryan, 2002; Akalu, 2003) and the design processes and features of project reviews (e.g. Mills and Kennedy, 1993a; Neale, 1995). In the accounting analytical research paradigm, a number of studies have considered the effect of private information and compensation schemes on managers’ capital investment decisions (e.g. Dutta, 2003). However,none of these studies has examined the benefits of project reviews, and their potential role as a knowledge transfer tool.

One of the very few empirical studies in accounting that has examined the benefits of project reviews was Chenhall and Morris (1993), who show that project reviews facilitate managerial learning, which, in turn, improved managerial performance. However, Chenhall and Morris (1993) also find that the degree of managerial learning was smaller when project reviews were carried out in a business environment characterized by high uncertainty, reflecting a context where managers are able to successfully withhold information over the long term. Chenhall and Morris’ finding suggest that although project reviews are potentially useful organizational learning tools, managers need to take into account factors that will mitigate their effectiveness.

In the present study, we are particularly interested in one such impediment; namely, managers’ tendency to withhold private negative project feedback during the review of an ongoing project. We explore two specific factors that potentially affect this tendency in terms of whether the

managers involved in the project review is also (i) the manager who initiated and managed the project, and (ii) there is a direct link between the performance evaluation of the manager and information elicited during the post-audit review.

2.1. Eliciting private negative information from the project manager to the organization: the effect of personal involvement

The rationale for including managers actively involved with the project under review in the post review process is based on these managers having private project information (e.g. information that provides explanations for cost overruns and performance of various components of the project). Once this information has been released by the manager, it can be pooled and shared with other managers, and eventually be embedded within the organization’s knowledge base as part of the organizational learning process.

However, one impediment to sharing the information is likely to be the degree of the project managers’ involvement with the project. Specifically, managers who have greater involvement with the project (e.g. by initiating the project or having an active role in managing of the project) are argued to have a greater perceived responsibility for the project. And higher personal responsibility has been associated with a number of dysfunctional managerial behaviour, such as the continuation of unprofitable projects in the escalation of commitment literature (e.g. Schulz and Cheng, 2002).

In the context of information sharing, we postulate that higher project involvement makes project managers more susceptible to the ‘self-justification bias’ (also known as ‘sponsorship bias’), which has been documented in both the accounting and psychology literature. Based on the more general theory of cognitive dissonance (e.g. Festinger, 1957), prior studies have postulated that managers who experience a higher level of personal responsibility for a project are more likely to self-justify the existence and continuation of the project, as well as to seek out confirming rather than disconfirming information about the project (Staw, 1976; Aronson, 1995).

Specifically, the theory of cognitive dissonance suggests that negative feedback (‘dissonant feedback’) about a prior decision generates cognitive dissonance. One way for managers to reduce such dissonance is to ignore or re-interpret the dissonant feedback, and continue or even increase their decision commitment (Festinger, 1957). A number of empirical studies in the escalation literature support this view. For example, Beeler and Hunton (1997) and Conlon and Parks (1987) both find that decision responsibility and the need for justification resulted in a preference for retrospective (and, hence, supportive) information. Similarly, Ryan (1995) reports that decision-makers sometimes re-interpreted critical events in a more positive light to support their prior commitment. Biyalogorski et al. (2006) recently found support for a decision responsibility effect on escalation behavior with the initial responsibility for the decision resulting in significantly greater tendency to continue with a losing product introduction. The framework used by Biyalogorski et al. (2006) is consistent with Festinger’s cognitive dissonance theory.

Whereas prior literature has predominantly explored the consequence of self-justification in terms of how these individuals seek out and use confirming or disconfirming information (e.g.

Conlon and Park, 1987; Keil, 1995; Ryan, 1995), in the present study we are interested in how it manifests itself in willingness to share negative (and, hence, disconfirming) information. We postulate thatnegative information creates cognitive dissonance with the initial decision to ‘green light’ the investment. Consistent with prior work into ‘self-justification bias’, we further expect that the degree of dissonance between the negative information and the initial investment decision will be greater for managers who were involved in making the initial decision and, therefore, perceive a higher level of personal responsibility for the initial investment decision (Festinger, 1957; Staw, 1976). We hypothesize that the outcome of this increased level of cognitive dissonance for these managers will be a greater tendency to regard the negative information as less important to both the initial decision and subsequent decisions and as such a lower likelihood of including this information in performance reports. Stated more formally:

H1: Managers who perceive a higher level of personal responsibility for the project under review are less likely to report negative project feedback, compared to those who perceive a lower level of personal responsibility for the project.

2.2. Eliciting private negative information from the project manager to the organization: the effect of performance evaluation

Information obtained during the post-review can also be used by the organization to jointly evaluate the performance of the manager as well as the project. Although the primary aim of project reviews is to analyze the performance (and factors contributing to the performance) of the project, the review process can also be used to evaluate the performance of the project manager with respect to his or her efficiency and effectiveness in implementing the project. Indeed, as a project manager’s performance is at least partially reflected in the success of the projects he or she manages, from the organization’s viewpoint the project review process is a useful way to gain insight into the project manager’s competence. For example, one of the aims of project review is to gather root causes for problems and then to make recommendations on how such problems can be avoided in the future (e.g. Von Zedtwitz, 2002). If the root causes identified reveal mismanagement on the part of the project manager, it will affect top management’s perception of the competencies of the project manager.

Using project reviews to evaluate a project manager’s performance gives rise to the moral hazard problem under agency theory. Agency theory states that a moral hazard problem exists when the goals of the principal and the agent conflict (incentive to shirk), and when it is difficult or expensive for the principal to verify the agent’s behavior (information asymmetry; Eisenhardt, 1989). When both incentive to shirk and information asymmetry occur, then agency theory predicts that the agent will exploit any information advantage to maximize his or her own welfare at the expense of the principal (e.g. by withholding private information; Sprinkle, 2003).

A number of prior studies has consistently shown that the problem of moral hazard exists in capital investment/resource allocation decisions (e.g. Harrison and Harrell, 1993, 1994; Rutledge and Karim, 1999; Booth and Schulz, 2004). In particular, Harrison and Harrell (1993) find that managers who are responsible for a poorly performing project are more likely to continue with

an unprofitable project where both information asymmetry and financial/career incentives are present. By continuing these failing projects, managers can delay the release of private negative information (i.e. the project is failing) and, therefore, advance their personal interests (i.e. financial incentives), which would otherwise be threatened by the release of this private information.

In the context of project reviews, information asymmetry is likely to already exist between the project manager and the review committee. Indeed, the existence of information asymmetry gives rise to the need to use the project review as an information sharing tool. Where the review is used solely for performance evaluation purposes, the project manager is provided with an incentive not to include and, hence, reveal negative information, as doing so would negatively affect their reported performance and, hence, the attached financial incentives. In contrast, where the purpose of the review is solely for organizational learning, revealing negative information will not affect their reported performance, as the organization is explicitly trying to learn not only from prior successes but also from prior mistakes. In fact, in such situations the sharing of and critical reflection on such negative information would be viewed as reflecting positively on the project manager.

As a consequence, we postulate that in the presence of information asymmetry, the intended use of the information obtained from the review has important consequences to the sharing of negative information by managers. Where the primary intention by the organization is to use it as a performance appraisal as opposed to an organizational learning tool, moral hazard facing the managers will be higher and, hence, managers are less likely to share negative information in the context of the former than the latter. Stated more formally:

H2: Managers who are involved in a project review as part of a performance evaluation process are less likely to report negative project feedback, compared to managers who are involved in a project review as part of an organizational learning process.

2.3. The interaction between personal involvement and the purpose of project review

It is unclear from the prior literature whether the negative effect of personal responsibility and using the project review to evaluate performance are additive or whether the two factors interact. Prior empirical studies in the accounting literature provide mixed evidence (Harrell and Harrison, 1994; Schulz and Cheng, 2002). In particular, Harrell and Harrison (1994) find a moral hazard effect in the context of managers being told that they were responsible for the project and, hence, controlled for self-justification effects by pegging their study to a context of responsible managers. Yet the subsequent study by Schulz and Cheng (2002) demonstrated that Harrell and Harrison (1994) might have inadvertently weakened the level of responsibility successfully created by studies, such as Staw (1976) (refer to Schulz and Cheng, 2002, for a discussion). However, Schulz and Cheng (2002) fail to find a separate moral hazard effect, which can potentially be attributed to a weaker moral hazard manipulation.2 As such, it remains unclear whether incentives have an independent addition effect to the level of responsibility.

The psychological literature also points to different predictions. On the one hand, the effect of self-justification biases and moral hazard might be additive as the former is a cognitive bias

related to how managers process information, whereas the latter provides managers with a motivational force not to share negative information in order to maximize their personal utility. To the extent that these are separate effects, we would not expect an interaction between the level of personal responsibility and the purpose of the project review.

In contrast, personal responsibility and project review purposes might interact. Prior literature on motivated reasoning suggests that individuals’ cognitive processes are affected by their motivation. In particular, people’s desire to arrive at a favorable outcome can lead to biases, such as selective memory search and underestimation of the importance of unfavorable events (e.g. Kunda, 1990; Browstein, 2003). Indeed, a high level of motivation to achieve a certain outcome is said to provide a trigger for the operation of a set of cognitive biases that allow individuals to arrive at a conclusion they prefer (Kunda, 1990). In the current context, the use of project reviews to evaluate managerial performance is likely to increase managers’ motivation to draw favorable conclusion about the project’s outcome. As such, it would add to the devaluating of the importance of negative information expected from the self-justification bias discussed previously and, therefore, result in a greater reluctance by these managers to share negative project information. On balance we postulate the latter and, hence, propose an interaction effect. Stated more formally:

H3 : The relative difference in tendency to report negative project feedback between managers perceiving a high level of personal responsibility for the project and managers perceiving a low level of personal responsibility will be greater when the intended use of the project feedback is performance evaluation of the managers than when the intended use is organizational learning.

3. Research method 3.1. Research design and subjects To test the proposed hypotheses, we conducted an experiment with a 2 × 2 between subjects design. The dependent variable was the degree to which two negative project feedback items were included in the review.3 Experimental subjects were 129 middle managers who were undertaking an MBA at a major Australian university. All subjects were enrolled in the same management accounting subject, which was part of the core of the MBA program. All subjects were volunteers and were given a random chance of winning a bookshop coupon. Their rewards were not linked to their responses in the experiment. The average age of the subjects was 30 years, and the average work experience was 8 years. As mature subjects with real-world business and management experience, the subjects were considered to have the appropriate background for the decision-making task used in this experiment.

3.2. Experimental task The experiment consisted of two stages: an initial investment decision followed by the completion of a project review report. Subjects assumed the role of a national marketing manager for a fast food company and were randomly assigned to one of the four experimental groups. In the First Stage (initial investment decision – 3 years prior to the current decision period), subjects were either asked to make a decision to invest in one of two available projects (high personal responsibility) or were told that their predecessor had made the initial investment

decision (low personal responsibility). The act of making the initial investment decision is expected to increase the feeling of volition and, therefore, personal responsibility in the subjects (Schulz and Cheng, 2002), as well as indicating to these subjects that they have been responsible for the project for a long time (3 years).4 This manipulation of personal responsibility was consistent with previous studies in the self-justification literature (e.g. Staw, 1976; Ghosh, 1997; Beeler, 1998; Schulz and Cheng, 2002).

The projects involved an intensive marketing campaign for a fast food product. All subjects were given information relating to the two products, such as the products’ previous sales and earnings figures, and a probability distribution of expected internal rate of return over the next 3 years. 5

This manipulation of personal responsibility was consistent with previous studies in the self-justification literature, which found that decision choice could induce high personal responsibility (e.g. Staw, 1976; Ghosh, 1997; Beeler, 1998; Schulz and Cheng, 2002). After all subjects had made (or were given) the initial investment decision, they were given further information indicating that 3 years after the initial investment decision, the chosen investment project was not performing as well as expected. For example, subjects were told that the average internal rate of return of the project was 14 per cent, which was below the company hurdle rate of 15 per cent and the original expected return of 20.25 per cent. Furthermore, prospective information was provided indicating that the expected internal rate of return for the next 2 years (16 per cent) would be below those of an alternative investment project (19 per cent).6

The Second Stage of the experiment involved asking subjects to complete a project review report by indicating the likelihood that they would include a list of information statements (representing major factors that have contributed to the project’s performance) in the review report. Subjects were also told the purpose of the project review, either for reviewing the project itself in order to facilitate organizational learning (the ‘organizational learning’ condition), or to evaluate managerial performance (the ‘performance evaluation’ condition). Consistent with previous studies that have examined the agency effect on decision biases (e.g. Harrell and Harrison, 1994), subjects in the performance evaluation group were given a substantial ‘incentive to shirk’ (to receive a favorable performance evaluation and a substantial year-end performance bonus).7

Subjects were then asked to indicate whether they would include each information statement in the review report. Four information statements were provided: two negative feedback statements and two positive feedback statements. Positive feedback refers to feedback information that had a profit-increasing impact on the project and was consistent with the initial investment decision. Negative feedback refers to feedback information which had a profit-decreasing impact on the project and was inconsistent with the initial investment decision. Although our research interest lies in managers’ bias against negative project feedback, positive feedback statements were also incorporated in the instrument to provide a more ‘balanced’ view of the project, and to avoid ‘leading’ subjects in their decisions. A summary of the two negative feedback statements provided to subjects is shown in Table 1.8 After all the experimental materials were collected a post-test questionnaire was administered, including demographic questions and manipulation questions (discussed later).

TABLE 1

3.3. Dependent and independent variables The dependent variable, subjects’ tendency to include/exclude information in the project review report, was measured using two negative feedback items as discussed earlier. Responses were measured on 7-point Likert scales (1 = Definitely No and 7 = Definitely Yes). The two independent variables are personal responsibility (high versus low) and the aim of the project review (performance evaluation versus organizational learning). As discussed previously, to manipulate personal responsibility, subjects in the ‘high responsibility’ treatment were asked to make the initial investment decision. Prior literature has argued that volition is an important factor that drives decision commitment and, therefore, a sense of responsibility (Kiesler, 1971; Schulz and Cheng, 2002). Furthermore, the high responsibility subjects were also told that they have been responsible for the project since their initial decision 3 years ago. In contrast, subjects in the ‘low responsibility’ treatment did not make the initial decision, and were told that they had taken over the project just before they were asked by the Project Audit Committee to complete a project review report. Therefore, it is expected that subjects in the low responsibility treatment were unlikely to feel significant responsibility towards the project.

To manipulate the aim of the project review, subjects in the ‘organizational learning’ treatments were told that the project review report would be presented to the Project Audit Committee, who would use the report solely for organizational learning. Furthermore, they were told that information arising from the project review process would not be used, now or in the future, in any evaluation of the subjects’ performance as project managers. Subjects in the ‘performance evaluation’ treatment were told that the project review report would be presented to the Project Audit Committee, who would then use the information for performance evaluation purposes. Furthermore, they were told that the information from the project review would directly and significantly affect subject’ opportunity to receive a substantial year-end bonus, as well as future career prospects. In addition, all subjects were told that the feedback information statements they received regarding the project were available only to themselves and not anyone else in the organization, unless subjects decided to include the feedback information in their project review report.

3.4. Pilot test A pilot study was conducted with 203 intermediate undergraduate students enrolled in a management accounting course. The results from the pilot study were substantially the same as the results from the current study. Based on the pilot study, several refinements were made, including clarification of the meaning of the feedback statements, strengthening of the ‘project review purpose’ manipulation, and the removal of references to feedback statements related to non-controllable events.

3.5. Manipulation check The manipulation of the two independent variables was assessed by asking subjects two manipulation check questions in the post-test questionnaire. The first question asked whether subjects were responsible for the initial decision to invest in one of the two investment projects. The second question asked subjects to indicate the purpose of the project review. Twenty-three

subjects responded incorrectly to the manipulation questions and were excluded from subsequent analysis, leaving 106 usable responses.9

Furthermore, consistent with earlier research studies that have manipulated the personal responsibility variable (e.g. Schulz and Cheng, 2002), two additional questions were included to assess subjects’ perception of personal responsibility. Subjects were asked to indicate (on 7-point scales) ‘To what extent did you feel that [the chosen project] was a reflection on yourself’ and ‘How responsible did you feel for [the chosen project]’s performance’. These two questions were then summed to form a perceived personal responsibility scale (theoretical range 2–14), which had an acceptable Cronbach alpha of 0.749. Analyses of responses from across the treatment groups (not tabulated) confirmed that subjects in the high personal responsibility groups perceived their responsibility as significantly higher (mean = 9.673) than subjects in the low personal responsibility group (mean = 7.725, t = 3.550, p = 0.001). Furthermore, subjects in the high responsibility treatment groups perceived their level of personal responsibility to be significantly higher (t = 7.375, p = 0.000) than the mean of the scale (average of 7 on the aggregation of two 7-point scales). In contrast, subjects in the low personal responsibility treatment group perceived their level of personal responsibility is not statistically different (t = 1.075, p = 0.086) from the mean of the scale. These findings provide support for a difference in the perceived level of personal responsibility between the high and low personal responsibility treatments.

Finally, analyses were conducted on the demographic data collected in the post-test questionnaires. No significant differences were found in the distribution of work experience (in years) and gender across the treatments. However, there were some significant differences in the distribution of Age. Further analysis showed that Age was not correlated with our dependent variable; therefore, it is suggested that the Age variable is unlikely to explain the between-subject differences of the dependent variable. Finally the distribution of mode of study (full time/part time) differed across treatments. Further analysis showed that variation in mode of study was not related to the decision to include negative information.

4. Results4.1. Descriptive statisticsTo analyze subjects’ tendencies to include/exclude different types of negative project feedback, we summed the response scores for the two feedback items into one variable: ‘willingness to share negative feedback’.10 The descriptive statistics (means and standard deviations) for the treatment groups are presented in Table 2.

4.2. Hypothesis testing Hypothesis 1 predicts that managers who perceive a higher level of personal responsibility for the project under review are less likely to report negative project feedback than those managers who perceive a lower level of personal responsibility for the project. As predicted, our results showed that subjects in the low responsibility treatment were significantly more likely to report negative project information (mean = 10.392) than their high personal responsibility counterparts (mean = 8.436). The two-way analysis of variance shows a significant main effect for personal responsibility (F = 14.531, p = 0.000; Table 3); hence, we support Hypothesis 1.

Hypothesis 2 investigates whether managers who perceive high levels of personal responsibility for the project under review are less likely to report negative project feedback if the project reviews are used for their performance evaluation than organizational learning. Table 2 shows that the level of information sharing is lower (mean = 8.681) for managers whose project review was used for performance evaluation purposes than for managers whose project review purpose was organizational learning (mean = 10.200). Our results show a significant main effect for project review purpose (F = 10.853, p = 0.000), and provides support for Hypothesis 2.

Finally, Hypothesis 3 predicts that the relative difference in tendency to report negative project feedback between managers perceiving a high level of personal responsibility for the project and managers perceiving a low level of personal responsibility will be greater when the intended use of the project feedback is performance evaluation of the managers than when the when the intended use is organizational learning. We do not find empirical support for this hypothesis (F = 0.613, p = 0.435).

TABEL 2 &3

5. Discussion and conclusionIt has been increasingly well recognized that knowledge is an important organizational resource, and as such, management accountants have responsibilities to manage this resource at least as well as other more ‘tangible’ organizational resources, such as financial and physical assets (e.g. Dess et al., 2004). The important role of management accountants in helping organization to gain knowledge by learning from its past operations is reflected in their involvement in the project review process. For example, Kennedy and Mills (1992) find that a majority of companies involve their accounting staff in their project reviews.

Yet we have argued in this study that there are a number of potential obstacles to learning from project reviews based on the manager’s willingness or lack of willingness to share past private information. Consistent with Chenhall and Morris (1993), this is likely to be the case where environmental uncertainty provides managers with the opportunity to withhold private information for longer periods of time. In our study, we explored two impediments to the effectiveness of project reviews in the form of personal responsibility and the link between the project review and the formal performance evaluation system of the organization. We hypothesized two separate effects using self-justification theory for the former and agency theory for the latter. Specifically, we stipulated both main effects for self-justification bias and the moral hazard as well as an interaction effect for the two factors for managers’ unwillingness to report negative project feedback during the project review process.

Our results lend support to both of our main effect hypotheses. Personal responsibility for the project and the purpose of the project of the review had significant separate effects on the manager’s willingness to incorporate negative project information in the project review. Managers with higher personal responsibility for the initial project decision were significantly less willing to disclose this type of information than managers with lower personal responsibility.

Likewise, where the performance evaluation was the purpose of the review, managers were significantly less likely to disclose negative project information than when the purpose of the review was organizational learning. We did not find empirical support for an interactive effect between the level of personal responsibility and the purpose of the project review.

Our results show that the intended use of the review information is an important consideration as managers exhibited information sharing impediments when the project review also forms part of the manager’s performance evaluation process. Overall, our study further shows that where sharing of negative information is of importance to the organization, the most effective project review design features is the combination of a manager with low personal responsibility for the project, and where the project review process is independent from the performance evaluation process. However, the latter is not necessarily feasible in practice as project information is unlikely to be ‘forgotten’ by a project manager’s supervisor during performance evaluation (the ‘curse of knowledge’). An alternative is to ensure that the responsibility for a project is shared between managers so no one manager believes that he or she is totally responsible for project performance. In these circumstances, personal responsibility is likely to remain low (even though collective responsibility should be high).

The contributions of our study to the research literature are twofold. First, our study provides an extension to a limited number of studies that examine project reviews, an important stage of the capital budgeting process. In particular, we provide evidence that the personnel involved as well as the purpose of the review have significant effects on managers’ willingness to include negative information in project reviews. Our study demonstrates that an understanding of the effects of accounting control on managerial behavior can be better achieved by considering both psychological-based theories (e.g. self-justification theory) and economic-based theories (e.g. agency theory). As several researchers have pointed out (e.g. Eisenhardt, 1989; Waller, 1995; Sprinkle, 2003), a multiple theory approach, in particular combining perspectives from psychological theories and economic-based agency theories, can provide a more comprehensive understanding of managerial behavior.

Our results also have important implications for practitioners responsible for the project review processes. Previous studies on project review practices has found that organizations often assign the responsibilities of preparing project review reports to an accountant associated with the project being reviewed, or to a small team of people drawn from those involved in the project (e.g. Mills and Kennedy, 1993b; Farragher et al. 1999). Although this practice might be the logical result of limited organizational resources, our results highlight the risks of biased information sharing among project review personnel who were also personally responsible for the project.

The usual limitations associated with laboratory studies apply to the current research. For example, although we have endeavored to capture the essential elements of capital budgeting decisions and project review processes, the experimental task represents a much-simplified decision-making context. As such, it omits some of the complex and often political factors involved in this kind of decisions. Furthermore, for the low personal responsibility treatment we have only looked at the decision point where a new manager came into the project just before the project review. The effect of personal responsibility might be different where the manager has

taken over the project earlier, such that they are partially responsible for some of the events contributing to the project performance. Indeed, it might be more appropriate to view the concepts of ‘responsibility’ and ‘involvement’ as a continuous scale. As project work is often non-linear in nature, a person might be involved with some parts of the project (e.g. idea generation or brought in to complete the project) but not all stages of the project. The degree of personal responsibility might, therefore, vary depending on the tasks undertaken by this individual and his or her tenure. In our study, we only manipulated personal responsibility as a dichotomous scale and did not consider various factors that might influence the degree of personal responsibility. Finally, we did not control for social desirability bias, such that participants in our performance evaluation treatment might be unwilling to withhold negative feedback items despite the negative financial implications associated with reporting such items. However, this limitation works against rather for our hypotheses and, therefore, does not reduce the validity of our findings.

The current research represents a preliminary step in investigating the potential impediments to the effectiveness of project reviews. Future studies can look at other feedback characteristics that might affect managers’ decision to share and transfer the information; for example, whether the feedback is based on objective data or subjective judgment. In addition, the way managers attribute the causes of project failure might also affect their knowledge sharing behavior. For example, managers might be less willing to share information that is directly attributed to personal mismanagement of the project, but more willing to report feedback that can be ‘blamed’ on a second party. Another potentially fruitful research avenue relates to the other design features of project reviews, such as team-based project reviewers versus individuals, the timing of the project review and the extent of information dissemination after the project review process and the subsequent effects on both individual and organizational learning. Finally, consistent with earlier studies such as Harrell and Harrison (1994), our study only examines the situation where information asymmetry exists and is ‘water-tight’. However, in a real-world setting, there might be varying degree of information asymmetry. Future research can investigate whether our findings and indeed escalation behavior in general still exist if there is only a moderate level of information asymmetry.