The usefulness of ®nancial and non®nancial
performance information in resource
allocation decisions
Jacqueline L. Reck
*School of Accountancy, University of South Florida, 4202 East Fowler Avenue, BSN 3403, Tampa, FL 33620-5500, USA
Abstract
In this article I evaluate the impact of adding non®nancial performance information to reports containing ®nancial information. I consider the association between non®-nancial information and the resource allocations and performance evaluations made by individuals involved with the governmental budget process. Tests indicated that the allocation decisions made bythese individuals were not signi®cantlyassociated with non®nancial information. However, non®nancial information was in¯uential in the performance evaluations of both the agencyand the agency's director. Although I found no association between non®nancial information and resource allocations, I found an association between ®nancial information and resource allocations. Additionally, ®-nancial information signi®cantlyimpacted the performance evaluation of the agency director.
An additional test of the importance of non®nancial information in resource allo-cations involved resource scarcity. As discussed in the paper, I hypothesized that under scarcitynon®nancial information and ®nancial information would become more im-portant to the allocation process. Myresults indicated that non®nancial information had no impact on allocation decisions made under scarcity. The association between ®nancial information and resource allocations was opposite that predicted. Ó 2001
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*Tel.: +1-813-974-4186; fax: +1-813-974-6528.
E-mail address:jreck@coba.usf.edu (J.L. Reck).
1. Introduction
In this article I examine how adding non®nancial information to govern-ment budget requests in¯uences budget allocation decisions and performance evaluations. A studyof non®nancial information is important since there has been a strong interest shown (Bisgay, 1995, p. 62; AICPA, 1994, p. 5; GASB, 1994, par. 54±56) in increasing accountabilitythrough the reporting of non®-nancial performance measures. The Governmental Accounting Standards Board (GASB) (GASB, 1994, par. 6) has been particularlyinterested in the reporting of non®nancial information and has lead in encouraging experi-mentation with non®nancial measures.
Since governments have no bottom line or net income ®gure for assessing performance, non®nancial performance measures arethought to be of special relevance to users of governmental reports. However, there is little theoretical or empirical research into the actual relevance of non®nancial measures to governmental users. Such research into the relevance or bene®ts of non®nan-cial information is of particular interest to policymakers and management given the cost that can be associated with developing, collecting and reporting non®nancial information. Of relevance to managers and policymakers is how non®nancial information will in¯uence resource allocation decisions. The belief that non®nancial information can in¯uence allocation decisions is identi®ed by the GASB (1987, par 77c), in Concepts Statement 1 which states that non®-nancial information,
when combined with information from other sources, helps users assess the economy, eciency, and eectiveness of government and mayhelp form a basis for voting orfunding decisions. (Empha-sis added.)
measures mayimpact users' decisions, (2) whether users will derive incremental decision bene®t from non®nancial performance measures relative to currently available ®nancial measures, or (3) whether the presence of resource scarcity in¯uences the association between ®nancial information, non®nancial infor-mation, and decisions. Byaddressing these three issues this article adds to extant research on the relevance of non®nancial information to governmental users.
Resource allocation decisions while made bylegislative bodies are in¯uenced bybudget oces (Hayand Wilson, 1995, p. 512). Budget ocials do reviews of budgets and make budget recommendations to legislative ocials; as a result, budget ocials are heavilyinvolved in the budget approval process (Freeman and Shoulders, 2000, p. 75). The lack of prior research regarding budget o-cials' allocation decisions combined with their abilityto in¯uence legislative decisions are the reasons budget ocials were selected as the subjects of this article. The budget ocers were asked to make budget recommendations on a ®ctitious city's department of health.
Contraryto prior research ®ndings (Reed, 1986, p. 131; Schrader, 1995, p. 453), this article found that non®nancial performance information is not rel-evant in budget ocers' resource allocation decisions. Rather, it is currently available ®nancial information that is signi®cantlyassociated with the resource allocation. This article reports, however, that non®nancial indicators are sig-ni®cantlyassociated with the respondent's evaluation of unit and individual performance. Unexpectedly, I found that when resources are scarce, the association between ®nancial information and the allocation of resources declines.
The rest of this article is organized as follows. Section 2 describes the in-stitutional background. In Section 3 the theoryand hypotheses are developed. The methodologyand results are presented in Section 4, while Section 5 gives conclusions of this article.
2. Institutional background
Speci®cally, while management may have access to more timely accounting information and less aggregated information than is provided in most external accounting reports, it is not believed that management has access to dierent types of accounting information due to the fact that most information systems are designed to meet external report needs (Smith, 1995, p. 281; Hyndman and Anderson, 1995, p. 3). Byfocusing on the incremental value of combining non®nancial information with a budget and actual report, this article con-tributes to research that attempts to address the question of whether the new information has bene®t.
The GASB has issued Concepts Statement 2 onConcepts Related to Service Eorts and Accomplishments (SEA) (GASB, 1994). As stated in Concepts Statement 2, the objective of SEA is to ``provide more complete information about a governmental entity's performance than can be provided by the op-erating statement, balance sheet, and budgetarycomparison statements and schedules. . .'' (GASB, 1994, par. 55). To accomplish SEA's objective the
GASB (1994, par. 6) is encouraging governments to experiment with reporting data on inputs, outputs, outcomes and eciency. Because government does not have a ®nancial outcome measure (net income), and performance is not directly observable, provision of non®nancial information is necessary(Van Daniker, 1994, p. 59; Baker, 1992, p. 600; Moe, 1984, p. 766) to meet users' needs concerning government performance.
Two major uses of ®nancial and non®nancial information are account-ability(stewardship) and decision-making (GASB, 1987, par. 5). This article focuses on accountabilitybecause of the increased demand for government accountabilityand because the GASB Concepts Statement 1 (GASB, 1987, par. 5±6) identi®es accountabilityas the cornerstone of governmental ®nan-cial reporting. Concepts Statement 2 (GASB, 1994, par. 20) recognizes that accountabilityis subject to a number of taxonomies. The taxonomyused by GASB (GASB, 1994, par. 20) identi®es four types of accountability: (1) ®-nancial resources (stewardship, operations accountabilityand viability), (2) compliance (meeting legal and regulatoryrequirements), (3) eciency(use of resources and economy), and (4) eectiveness (attainment of program goals and objectives).
per-formance measures1are perceivedas being useful, little non®nancial perfor-mance information is actuallyavailable (Chamberlain, 1990, p. 91; Hyndman and Anderson, 1995, p. 3), and consequentlylittle empirical research exists on actual use of non®nancial performance measures.
Two studies (Reed, 1986, p. 111; Schrader, 1995, p. 443) that have looked at the use of non®nancial performance measures have found a relationship be-tween perception and use. Reed (1986, p. 128) found that the budget allocation decisions of budget preparers and examiners were aected byoutcome and impact measures. While Reed's (1986, p. 117) studydid not directlyaddress the accountabilityissue, subjects were told to allocate funds to projects exhibiting ``prior success'', which was de®ned in terms of eciencyand eectiveness variables (two types of accountability de®ned by GASB). The premise of Schrader's (1995, p. 445) exploratorystudyon service eorts and accom-plishments (SEA) was that inclusion of accountabilitymeasures would improve the decision process. Schrader (1995, p. 455) found that when governmental auditors were asked to rate a program on the de®ned terms economy, eciency and eectiveness there were signi®cant dierences in ratings when subjects were provided with just ®nancial statements versus SEA measures. The studies by Reed (1986) and Schrader (1995) are somewhat supported byinterviews with the State of Georgia budget planners and analysts (Lauth, 1985, p. 72), who indicated that non®nancial measures were used, at least somewhat, in pre-paring gubernatorial budget recommendations.
The next section provides insight into whynon®nancial performance infor-mation maybe relevant to groups involved in the resource allocation process.
3. Theory and hypotheses
3.1. The principal±agent model and accountability information
The exchange of information necessaryin an accountabilityrelationship is highlighted in the following de®nition, which provides that accountabilityin-volves: (1) establishing a set of relationships which identi®es who (agent) is accountable to whom (principal), (2) utilizing methods and procedures through which the agent provides an accounting of eort, eciencyand eectiveness, and (3) distributing rewards and sanctions for agent performance (Weissman, 1983, p. 323).
The preceding de®nition of accountabilityis formalized in agencytheory. Under agencytheorythe right to information stems from the need to ensure
1Eciencyand eectiveness tend to be assessed with non®nancial performance measures such as
that the agent has actuallyperformed the services or objectives desired bythe principal (Gjesdal, 1981, p. 208, 211). The complexityof the tasks required of the agent and the unobservabilityof the agent's eort (information asymme-tries) provide the agent with incentives to shirk (Alchian and Demsetz, 1972, pp. 780±781; Baiman, 1982, p. 166). To limit shirking the principal must monitor the agent's eort or require the agent to incur costs of providing monitoring information (Jensen and Meckling, 1976, p. 308).
Monitoring of agent eort can be accomplished using observable measures (Gjesdal, 1981, p. 212). External ®nancial reports are one source of observable measures that can be used for monitoring agent eort (Gjesdal, 1981, pp. 208± 209; Holmstrom, 1979, p. 89; also see Reck, 2000, p. 339). In the basic prin-cipal±agent model a principal contracts with an agent for the agent to select and undertake certain actions or levels of eort (Jensen and Meckling, 1976, p. 308). The principal pays for, and enjoys the net outcome2of the agent's eort (Demski, 1980, p. 89; Baiman, 1982, p. 171). The principal±agent model is de®ned in monetaryterms with net outcome representing a payo determined bythe agent's eort and random events or states of nature3(Holmstrom, 1979, p. 75; Baiman, 1982, p. 173; Feltham and Xie, 1994, p. 431). Under the basic model the principal's objective is to maximize economic eciencyor the net monetaryoutcome (Baiman, 1982, p. 165). The principal's problem is to choose a contract which will ensure the maximum amount of net monetary outcome (Baiman, 1982, p. 165).
In a government setting the basic principal±agent model needs to be ad-justed for the fact that there is no clearlyde®ned objective, such as maximizing net monetaryoutcome, on which a contract can be constructed. To the con-trary, principals may have multiple objectives for government, the least of which maybe economic eciency(Moe, 1984, p. 761, 765). When monetary outcome cannot be used to evaluate the agent's eort, Baker (1992, p. 612) has shown that a performance measure can be used to indirectlymeasure the principal's objective if both the principal's objective and the performance measure are related to the agent's eort. To the extent the performance mea-sure captures the agent's eort it can be used to meamea-sure attainment of the principal's objective (Baker, 1992, p. 612). To capture agent eort, principal± agent models have focused on the creation of a single measure that is as congruent as possible with the principal's objective (Feltham and Xie, 1994, p. 434). Feltham and Xie (1994, p. 430) point out that using a single measure may not be ecient if more than one objective is involved, or if there is not one
2Net outcome is the total outcome of the agent's eort less the reward paid to the agent.
3States of nature are assumed to be random, uncontrollable events (Feltham and Xie, 1994, p.
good measure of the objective (both of which maybe true in government). As Baker (1992, p. 599) indicates, performance measures are indirect measures of the principal's objective and as such it is highlylikelythat one performance measure will imperfectlymeasure the objective (i.e., there will be noncongruity between the agent eort and the objective as a result of using an indirect measure). The use of more than one performance measure bythe principal can increase congruityif the added measures induce the agent to increase eort toward attaining the principal's objective (Feltham and Xie, 1994, p. 430).
Baker's (1992, p. 599) and Feltham and Xie's (1994, p. 447) models suggest that accountabilitymeasures can be used to assess the agent's performance as long as the ®nancial and non®nancial information and the principal's objec-tive(s) are related to the agent's eort. While government budget ocials (principals) do not have the objective of maximizing pro®t theymayhave other objectives which can be captured to a degree by®nancial and non®nancial in-formation (Moe, 1984, pp. 759±761). Budget ocials have career objectives, or reputation (Moe, 1984, p. 767). To enhance or maintain their reputation, budget ocials (principals) will want to ensure, at a minimum, that agents (department heads/managers) are complying with budgetary (legal) requirements (Moe, 1984, p. 762). Concern about meeting ®scal targets and future ®nancial viability mayalso aect the budget ocer's reputation. Using compliance accountability measures and ®nancial accountabilitymeasures to assess an agent's eorts concerning attainment of ®scal targets and continued viabilitywould be useful to budget ocials (Jones et al., 1985, p. 39, 43). Reputation will also be aected bythe principal's abilityto carryout the policies of elected ocials (Moe, 1984, p. 771). If budget ocials are concerned that program objectives re¯ect policy then use of eciencyand eectiveness measures will increase agent eort toward the implementation of policy. Since currently available ®nancial measures cannot accuratelyre¯ect the eort being expended byan agent to implement policy, ®nancial measures create an incongruity between the principal's objec-tive and agent eort (GASB, 1994, par. 4±5; Feltham and Xie, 1994, p. 434). The theoretical need for eciencyand eectiveness measures is supported in the surveyliterature discussed in Section 2 of mypaper and in the work done by Reed (1986, p. 131) and Schrader (1995, p. 453) that show principals want and will use eciencyand eectiveness information.
H1: Financial information has an eect on the principal's evalua-tion such that the reward will be higher when ®nancial informaevalua-tion is favorable than when ®nancial information is unfavorable.4
If the theoretical models and the institutional literature (Reed, 1986, p. 131; Chamberlain, 1990, pp. 78±87; Schrader, 1995, p. 453) are correct, non®nancial performance information should also increase the principal's abilityto assess the agent's eort. Non®nancial information is especiallyimportant in deter-mining whether overall policyobjectives have been met. The posited value of non®nancial performance information suggests that it will have an impact on the principal's evaluation. Therefore, it is hypothesized that:
H2: Non®nancial performance information5has an eect on the principal's evaluation such that the reward will be higher when fa-vorable non®nancial performance information is present, and lower when unfavorable non®nancial performance information is present.
Feltham and Xie (1994, pp. 439±440) have posited that increasing the number of performance measures will enhance the principal's abilityto assess agent performance if the measures contain relevant and unique information. Information provided by®nancial measures and non®nancial performance measures should be relevant (Feltham and Xie, 1994, p. 439) in assessing agent performance since each of the measures has been identi®ed in Section 2 of this paper as addressing a dierent type of accountability perceived as important by government principals. Information provided bythe measures should also be unique (Feltham and Xie, 1994, p. 439) since the focus of ®nancial measures is on the inputs provided to agents; whereas, the focus of non®nancial perfor-mance measures is on the outputs and outcomes achieved byagents. If ®-nancial and non®®-nancial performance measures are relevant and unique, they will measure important but dierent factors (Feltham and Xie, 1994, pp. 439± 440); therefore, no interaction is expected.
3.2. The impact of resource scarcity6
A factor which has become increasinglyimportant in anyassessment of government is resource scarcity. Case studies (Wolman, 1980, p. 238; Levine
4
Reward is measured bythe three dependent variables de®ned in Section 4. For a de®nition of favorable and unfavorable ®nancial information the reader is referred to the independent variables section of the paper.
5In this paper non®nancial performance information is represented bymeasures of eciencyand
outcome. For a de®nition of favorable and unfavorable non®nancial information the reader is referred to the independent variables section of the paper.
et al., 1981, p. 621, 623; Higgins, 1984, p. 351) indicate that under conditions of resource scarcityattention increasinglyfocuses on management performance. For governments with fewer resources available for allocation, attention to improving performance is considered preferable to decreasing service levels. In a studyof ®ve state universities, Rubin (1980, p. 169) found that during scarcitymore criteria for evaluation were established.
DeMarco and Holley(1984, p. 179) found that when principals were pro-vided with accountabilitymeasures, allocation of scarce resources became more rational with greater attention given to agent eort. Therefore, it is hy-pothesized that an interaction will occur between accountabilityinformation and resource scarcitysuch that:
H3: Accountabilityinformation will have a greater eect on the re-wards given under resource scarcitythan on rere-wards given under no resource scarcity.
DeMarco and Holley(1984, p. 179) indicate that resource scarcitywill have an eect on resource allocation rewards. However, the hypothesis does not limit the analysis to resource allocations since there is some indication that govern-ments with fewer resources would prefer to increase eciencyand eectiveness before decreasing service levels. Therefore, it is possible that allocations will not be aected byresource scarcityas will other types of evaluations.
4. Design and statistical analysis
4.1. Sample
The sample was drawn from cities that had populations that ranged from 25,000 to 1,000,000.7 Carroll's Municipal/CountyDirectory(1995) was em-ployed to determine city size, see which individuals were in budget positions, and to select the sample (see Reck, 2000, p. 340). Nine hundred individuals were included in the study. To ensure that the correct individuals were iden-ti®ed, individuals surveyed were asked to verify that they were involved in the budget process for their city. All respondents included in this study indicated that theywere involved with the budget process.
Individuals surveyed were asked to provide demographic information which was used to determine whether there were anysigni®cant dierences among respondents that could impact the results of the study(see Reck, 2000, p. 240). Demographic variables collected were political partyof the individual, political party in power, type of government, gender, age, ethnicity, education,
rience with non®nancial performance measures, size of city, how many years subjects had held their current position, and whether theyor their families had used the services of a government department similar to the department used in the experiment.
4.2. Variables of interest
In a government setting, a principal's assessment can result in a number of dierent rewards or sanctions. The agent can be terminated if the principal believes the behavior deviates excessivelyfrom the principal's goals (Baiman, 1982, p. 166). This happens when incumbents are not reelected, when bureau directors are asked to resign, and when employees are terminated (Moe, 1984, p. 764; Mueller, 1989, p. 248). Because it can sometimes be dicult to termi-nate agents8another option available to the principal, and the option exam-ined in this article, is changing resource allocations (Ijiri, 1983, p. 78; Weissman, 1983, p. 323; Weingast, 1984, pp. 154±156). This article used re-source allocation (ALLOC) as an indicator of the principal's satisfaction or dissatisfaction with the agent's performance. The measure of resource alloca-tion was dollars awarded the department of health of a ®ctitious city.
The de®nition of accountabilityimplies that agents with the most exemplary performance will receive the greatest reward. However, this maynot always be true in governmental settings. While a government principal mayjudge an agent's performance to be exemplary, allocations (rewards) may not be maintained or increased because of the belief that the ecientlyperforming agent is not as needyas other agents.9Additionally, in a government setting there maybe a separation between the performance of the agencyand the individual managing the agency. While the agency may not be performing as desired, the principal's objective (such as implementing social policy) may preclude sanctioning the agencybyreducing resource allocations (Moe, 1984, p. 766). Since the possibilityexists that allocation actions will not re¯ect judgment about performance, a second set of variables was used to ascertain the principal's judgment about performance. Respondents were asked to rate performance at both the unit (or agency) level, and the individual (or manager) level. At the unit level, performance (SCORE) was evaluated using a 100-point scale with 50 representing average performance. To tie performance evaluation to the individual and resources allocated the individual, subjects were also
8Moe (1984, pp. 764±765) points out that the civil service and union contracts make it dicult to
make changes in the labor force.
9The statement is based on Berg (1984, p. 78) and the state budget experience of the author,
asked to indicate their willingness to award the agent a merit payraise (MERIT) based on information provided. Willingness to provide a merit pay raise was indicated on a seven-point Likert type scale.
Financial information (FIN), non®nancial performance information (PEFF), and resource scarcity(SCARCE) were the independent variables tested.10The independent variables were included in a budget request made by a ®ctitious department of health (see Reck, 2000, p. 326). Financial information was represented byaccounting information presented in a line-item operating budget format.11The budget request provided accounting information for the prior period and the current period. Individuals surveyed were assigned to re-ceive one of two types of accounting information ± favorable or unfavorable. If there were no signi®cant variances from the original budget, information was classi®ed as favorable. Additionally, favorable information was indicated by a stable spending pattern. A stable spending pattern was used since decreased spending mayhave been perceived bysubjects as an indication of decreased support for the program, or a decreased need for the program, neither of which relates to the agent's performance. Unfavorable accounting information was represented byunfavorable spending variances and an upwardlyrevised oper-ating budget. In the unfavorable condition expenditures had increased rather than remaining stable (see Reck, 2000, p. 340).
Non®nancial performance information was represented byeciencyand eectiveness measures. The measures used were constructed from recommen-dations provided byHatryet al. (1990, pp. 223±224) and various government reports (Missouri Department of Health, 1993, pp. 17, 22, 41; Cityof Co-lumbia, Missouri, 1995b, pp. 60±61). Individuals surveyed were assigned to receive favorable, unfavorable, or no eciencyand eectiveness measures. When eciencyand eectiveness measures improved, or were projected to improve, the information was considered favorable; conversely, if the eciency and eectiveness measures showed decreases the information was considered unfavorable (see Reck, 2000, pp. 340±341).
Resource scarcitywas determined bylevel of revenues and the level of the unreserved fund balance as a percentage of expenditures. In the no scarcitysit-uation revenues increased at a slightlygreater rate than in¯ation and the unre-served fund balance was near the city's desired target of 15% of a year's expenditure requirements. When resources were scarce, revenue increases were insucient to cover in¯ation and service demands, and unreserved fund
10Due to the study's resource constraints, compliance and ®nancial accountability (®nancial
information) were tested together as were eciencyand eectiveness accountability(non®nancial information).
11For an example of a line-item budget format, the Cityof Columbia, Missouri's (1995a, pp. 5,
balances, relative to annual expenditures, fell to below 5%.12A description of dependent and independent variables, as well as covariates is provided in Table 1. While covariates are included for control purposes, based on additional research (Reck, 2000), it is not expected that the covariates will aect the in-dependent variables. Applying the same methodology, I (Reck, 2000, p. 345) found that use of ®nancial and non®nancial measures was not aected by budget ocials' individual characteristics, such as moral judgment and polit-ical beliefs.
4.3. Test instrument13
Individuals surveyed received a scenario in which theywere told theywere an ocial in budgeting for a ®ctitious city(Reck, 2000, p. 346). Based on the information furnished, respondents provided a budget allocation for the city's department of health. Additionally, respondents rated the overall performance of the department of health and indicated how likelytheywould be to award a merit payraise to that department's director.
Individuals surveyed received information about both the city and the de-partment of health (Reck, 2000, p. 346). Total revenues for the last two year's, the current year's revenue projection, and ®nancial condition measures were provided for the city. The city's budget request and current period budget, broken down bydepartment, were provided. The mission statement, the de-partment's objectives, and brief justi®cations for requested budget increases were provided along with the line-item budget for the prior period, current period and requested period. Expected and actual ®gures for four eciencyand ®ve eectiveness measures were included for the prior period and the current period.14
The 900 individuals were randomlyassigned to one of 12 treatment cells created bythe 232 between-subjects factorial design. The 12 treatments were created bytwo levels of ®nancial information (favorable [FF], or unfa-vorable [UF]), three levels of non®nancial performance information (faunfa-vorable [FP], none [NP], or unfavorable [UP]), and two levels of resource scarcity(no scarcity[NSC], or scarcity[SC]).
Each individual was mailed a questionnaire and the scenario appropriate to his/her cell assignment. The original mailing and two follow-up mailings re-sulted in 234 usable responses, or a 26.0% usable response rate.
12
Unreserved fund balances below 5% of annual operating expenditures are considered a sign of ®scal stress byrating agencies (Hayand Wilson, 1995, p. 409).
13I conducted pre-testing and made adjustments to the instrument based on the pre-testing (this
is described in Reck (1996, pp. 59±61), and Reck (2000, pp. 348±349)).
14To view the test instrument see Reck (1996, pp. 122±127) and Reck (2000, pp. 346±348). Those
Table 1
Description of variables
Name of variable Description
Dependent variables
ALLOC The amount of resources respondents allocated to the department of the health, as measured in dollars.
SCORE The overall performance score the respondent awarded the depart-ment. The performance score was awarded on a 100-point basis with 1 indicating the lowest performance and 100 the highest performance
MERIT The likelihood the respondent would award the director of the department a merit raise based upon the information the subject received. Likelihood was rated on a 1±7 scale with 1 indicating no likelihood and 7 indicating certainty
Independent and moderator variables
FIN A measure of the two accounting information treatments: favorable budget information (coding1), or unfavorable budget information
(coding2)
PERF A measure of the three performance information treatments: favorable performance information (coding1), no performance information
(coding2), or unfavorable performance information (coding3)
SCARCE A measure of the two resource scarcitytreatments: weak ®nancial position with a shortfall of revenue (coding1), or strong ®nancial
position with no revenue shortfall (coding2)
Covariates
GOVPARTY Relates to the governing partyof the city: Democrat (coding1), nonpartisan (coding2), Republican (coding3), or other (coding4)
TYPEGOV Relates to the title of the individual governing the day-to-day operations of government: cityadministrator (coding1), city
manager (coding2 ), mayor (coding3), or other (coding4)
USEEE Relates to whether the city's government uses eciency and eective-ness measures: yes, the city uses such measures (coding1) or no, the
citydoes not use such measures (coding2)
GENDER Female (coding1) or male (coding2)
L_C The respondent's own assessment of his or her political beliefs. In the test instrument the order of presentation was conservative, liberal and moderate. The statistical analysis indicated: conservative (coding1),
moderate (coding2) and liberal (coding3)
AGE The respondent's age in years
EDUC The respondent's level of education: high school (coding1),
asso-ciate's (coding2), bachelor's (coding3), master's (coding4),
doctoral (coding5), or other advanced degree (coding6)
MAJOR Indicator of the respondent's educational background. In the test instrument the order of presentation was accounting, business administration, ®nance, public administration, and other. The statis-tical analysis indicated: accounting (coding1), ®nance (coding2),
business administration (coding3), public administration
A review of Table 2 indicates that over half of the respondents were from nonpartisan governments, and worked with citymanagers. The majorityof the respondents (58.8%) worked for governments that do not use eciencyand eectiveness measures. Respondents tended to be white (91.8%), male (76.5%), and in their forties (mean42.99). Over half (51.5%) of the respondents hold master's degrees, with almost half (46.6%) identifying accountancy as their primary®eld of study. Respondents were relativelyequallydivided among Republicans, Democrats and independents; however, respondents over-whelmingly(90.5%) considered themselves to be moderates or conservatives.
Three sources of information were used to test for nonresponse bias. The three sources were the original sample, The Municipal Year Book 1995 (In-ternational City/County Management Association, 1995)15 and earlyversus late responders.16In general, respondents did not appear to be substantially dierent than the population sampled.
Table 1 (Continued)
Name of variable Description
ETHNIC The respondent's ethnic categoryas de®ned bythe federal government: African±American (coding1), Asian/Paci®c Islander (coding2),
Hispanic (coding3), Native American (coding4), or white
(coding5)
EXPER The number of years the respondent has held his or her current position
PARTY The respondent's political aliation: Democrat (coding1),
inde-pendent (coding2), Republican (coding3), or other (coding5) USE An indication of whether the respondent or his/her familyhas ever
used the services of the city's health department: no (or city has no health department) (coding1) or yes (coding2)
CITYPOP The population of the respondent's city. Obtained fromCarroll's Municipal/Country Directory(1995)
15The Municipal Year Book(1995) compiles data on cities with populations over 2500. It uses a
varietyof sources for collecting data, including surveys.The Municipal Year Book(1995) response rate for cities the size of those used in this studyexceeds 1000 for all variables analyzed.
16Respondents were compared to the original sample of 900 on the variables GENDER and
4.4. Statistical analysis
Because the dependent variables were highlycorrelated, factor level planned comparisons were conducted using MANOVA tests followed byplanned comparisons using ANOVA (Stevens, 1992, pp. 152, 160). The multivariate tests provided an indication of the overall signi®cance of the variables, thereby allowing for a univariate analysis of individual variables.
4.4.1. Descriptive statistics
Spearman correlations among the dependent variables and independent variables are presented in Table 3. As anticipated, the dependent variables (ALLOC, SCORE and MERIT) were signi®cantlyand positivelycorrelated (p<0:05, two-tail test). Spearman correlations between the dependent and independent variables were in the expected direction, with unfavorable Table 2
Demographic characteristics of subjects
Variable Frequency1 Frequency2 Frequency3
Panel A: frequencies of discrete variables
GOVPARTY Nonpartisan Republican Democrat (n219) (64.5%) (23.7%) (23.3%)
TYPEGOV Citymanager Mayor Cityadministrator (n234) (58.8%) (16.7%) (14.5%)
USEEE Do not use Do use
(n233) (58.8%) (41.2%) ± GENDER Male Female
(n234) (76.5%) (23.5%) ±
L_C Moderate Conservative Liberal (n231) (49.4%) (41.1%) (9.5%)
EDUC Master's degree Bachelor's degree Associate's degree (n231) (51.5%) (46.3%) (1.3%)
MAJOR AccountancyPublic admin Business admin (n232) (46.6%) (22.8%) (15.9%)
ETHNIC White African±Ameri-can
Asian/Paci®c Island-er & Hispanic (n232) (91.8%) (3.4%) (1.7% each)
PARTY Republican Independent Democrat (n230) (36.1%) (33.9%) (28.7%)
USE Have not used Have used
(n233) (84.5%) (15.5%) ±
Panel B: descriptive statistics of continuous variables
Variable n Mean Median S.D.
AGE 230 42.99 42.50 8.09
EXPER 234 7.51 6.00 5.96
information correlated with lower levels of the dependent variables. There were no signi®cant correlations among independent variables.
Table 3 also presents the correlations of the dependent and independent variables with the covariates. Two covariates (GOVPARTY and USE) were correlated with the dependent variable SCORE. A MANOVA17 was con-ducted to determine if either of the covariates contributed signi®cantlyto ex-plaining the level of the dependent variables. Neither of the covariates signi®cantlyin¯uenced (alpha0.05, two-tail test) the level of the dependent variables.18
Table 4 indicates that when both FIN and PERF were favorable mean levels of ALLOC, SCORE and MERIT were at their highest levels relative to the other cells. Unexpectedly, the lowest level for ALLOC tended to occur when FIN was unfavorable and no PERF information was provided, rather than when both FIN and PERF were unfavorable. The in¯uence of FIN on the Table 3
Spearman correlation coecientsa
Panel A: Spearman correlation of dependent and independent/moderator variables with covariates (n234)
ALLOC SCORE MERIT FIN PERF SCARCE
ALLOC ±
SCORE 0.438 ±
MERIT 0.336 0.663 ±
FIN )0.124 )0.064 )0.132 ±
PERF )0.182 )0.610 )0.463 )0.064 ±
SCARCE 0.248 0.042 0.028 0.071 )0.069 ± GOVPARTY )0.065 )0.140 )0.017 0.060 0.032 )0.021 TYPEGOV 0.037 0.022 0.042 )0.036 )0.067 0.076 USEEE )0.009 0.020 0.064 )0.016 0.069 0.085 GENDER )0.063 )0.097 0.022 0.129 0.107 0.110 L_C 0.091 0.084 0.072 0.018 )0.042 )0.059 AGE )0.081 )0.084 )0.055 )0.026 0.096 0.015 EDUC )0.129 )0.071 )0.039 0.084 0.096 )0.010 MAJOR 0.018 0.090 )0.005 )0.001 )0.032 0.023 ETHNIC )0.075 )0.130 )0.062 )0.037 )0.009 0.025 EXPER )0.085 )0.038 )0.047 )0.029 0.050 )0.062 PARTY )0.018 0.021 0.061 )0.014 )0.073 0.034 USE 0.033 0.137 0.069 )0.040 )0.002 )0.040 CITYPOP 0.049 0.050 0.000 )0.021 0.006 0.037
a
Highlighted correlations are signi®cant at the 0.05 level, for a two-tail test. See Table 1 for variable descriptions.
17A MANCOVA was also conducted using all 13 covariates. The results indicated none of the
covariates was signi®cant.
dependent variables was as expected, with favorable FIN generallyresulting in larger ALLOC, SCORE and MERIT than unfavorable FIN. Of interest was the fact that variabilityof ALLOC was considerablygreater when FIN was unfavorable than when FIN was favorable. The in¯uence of PERF on SCORE and MERIT was re¯ected in the means. When PERF was favorable, SCORE and MERIT had higher mean levels than when PERF was unfavorable.
4.4.2. Tests of hypotheses
Table 5 provides the results of the MANOVA analysis. MANOVA indi-cated FIN (F 3:69; p0:006, two-tail test) and PERF (F 23:92; p<0:001, two-tail test) had an overall eect on the dependent variables. As
expected, MANOVA showed there was no signi®cant interaction
(F 1:13; p0:34, two-tail test) between FIN and PERF.
To test hypotheses one and two directional comparisons were made. Since direction was hypothesized, the following discussion of the results for H1 and H2 is based on one-tail tests. The dierences between factor level or treatment Table 4
Descriptive statistics bytreatment for dependent and independent variables (n234)a
Financial information (FIN)
Non®nancial performance information (PERF)
Favorable information
No information Unfavorable information
Favorable information
ALLOC 3258.71 3234.45 3236.18 (46.76) (92.95) (42.51)
n36 n44 n46
SCORE 79.53 61.34 42.98
(15.19) (22.28) (16.83)
n36 n38 n45
MERIT 4.57 2.57 2.45
(1.68) (1.54) (1.39)
n36 n41 n46
Unfavorable information
ALLOC 3236.38 3187.84 3225.38 (104.42) (109.87) (88.08)
n40 n31 n37
SCORE 76.92 43.33 42.61
(15.24) (26.24) (22.42)
n39 n27 n35
MERIT 4.18 1.67 1.92
(1.75) (1.12) (1.23)
n40 n30 n37
aMeans are followed by(standard deviation) and cell size. The dependent variables are listed for
each cell; ALLOCresource allocation, SCOREunit performance score, and MERIT
level means are re¯ected in Table 6, panels A and B. The comparisons were conducted using the Bonferroni method of multiple comparisons.19
Relative to unfavorable ®nancial information (UF), favorable ®nancial in-formation (FF) resulted in signi®cantlyhigher ALLOC (mean di.23.33; p<0:05, one-tail test) and MERIT (mean di.0.42;p<0:05, one-tail test). To further test H1 an analysis was conducted at the treatment level, comparing favorable ®nancial information (FF) to unfavorable ®nancial information (UF) when non®nancial performance information was not present (NP). Panel A shows that consistent with the factor level analysis, ALLOC and MERIT had signi®cantly(p<0:01, one-tail test) higher values when ®nancial infor-mation was favorable (FF). However, contraryto the factor level ®nding, treatment level analysis showed SCORE was signi®cantly (p<0:001, one-tail test) and positivelyin¯uenced byfavorable ®nancial treatment information. The mean dierence at the factor level versus the treatment level increased more than fourfold. The treatment level comparison is most similar to ana-lyzing the current state of reporting requirements (i.e., currently non®nancial performance information is often not required). The highlysigni®cant results suggest that when only®nancial information is available it is used not onlyin awarding resources but also in evaluating an agent's performance.
Table 5
General factor level eects using MANOVA (n234)
Independent variablea F-valueb p-valuec
FIN 3.69 0.006
PERF 23.92 <0.001
SCARCE 0.73 0.57
FIN*PERFd 1.13 0.34
FIN*SCARCE 1.33 0.26
PERF*SCARCE 1.31 0.24
aFIN
overall eect of the independent variable ®nancial information, PERFoverall eect of
the independent variable non®nancial performance information, SCARCEthe eect of resource
scarcityversus no resource scarcity, FIN*PERFthe multiplicative interaction of FIN and PERF,
FIN*SCARCEthe multiplicative interaction of FIN and SCARCE, and PERF*SCARCEthe
multiplicative interaction of PERF and SCARCE.
b
F-values based on Wilks' Lambda.
c
p-values are for two-tail tests.
d
As anticipated the FIN*PERF interaction was not signi®cant in this model or a reduced model based on just FIN and PERF, therefore it is not included in subsequent models.
19
Hypothesis H2 predicted that favorable non®nancial performance infor-mation (FP) would result in higher dependent variables relative to unfavorable (UP) or no (NP) non®nancial performance information. Comparisons (Table 6, panel B) indicated non®nancial performance information was generallynot signi®cant in in¯uencing the level of ALLOC. There was support, however, for Table 6
Planned comparisonsa
Panel A: hypothesis 1-planned comparisons of the eects of favorable (FF) and unfavorable (UF) ®nancial information on dependent variables
Multivariate tests
Comparison F-value p-valueb
FF>UF 3.69 0.006 Bonferroni univariate t-testsc
Dependent variable Comparison Mean dierenced p-value
ALLOC FF>UF 23.33 <0.050
FF&NP>UF&NP 46.61 <0.010
SCORE FF>UF 3.85 n.s
FF&NP>UF&NP 18.01 <0.001
MERIT FF>UF 0.42 <0.050
FF&NP>UF&NP 0.91 <0.010
Panel B: hypothesis 2-planned comparisons of the eects of favorable (FP), unfavorable (UP), and no (NP) non®nancial performance information on dependent variables
Multivariate tests
Comparison F-value p-value FP>NP 23.22 <0.001 FP>UP 38.83 <0.001 UP<NP 12.94 <0.001 Bonferroni univariate t-tests
Dependent variable Comparison Mean dierence p-value
ALLOC FP>NP 31.78 <0.05
FP>UP 15.59 n.s. UP<NP 16.19 n.s.
SCORE FP>NP 24.31 <0.001
FP>UP 35.36 <0.001 UP<NP )11.04 <0.010
MERIT FP>NP 2.17 <0.001
FP>UP 2.15 <0.001 UP<NP 0.02 n.s.
aA comparison such as FF&NP represents a treatment level comparison indicating that the cell
FF&NP contains favorable ®nancial information and no non®nancial performance information.
bThep-values provided for the multivariate tests are two-tailed probabilities.
cBecause a relativelysmall number of comparisons was made for each hypothesis, Bonferroni
one-tail t-tests were conducted. Therefore, all p-values provided for univariate tests are one-tailed probabilities.
d
the proposal that SCORE (p<0:001, one-tail test) and MERIT (p<0:001, one-tail test) would be higher if favorable non®nancial performance informa-tion (FP), rather than unfavorable (UP) or no performance informainforma-tion (NP), was provided to users. Relative to no non®nancial performance information, unfavorable information did result in signi®cantlylower SCORE (p<0:01, one-tail test) but not lower MERIT. The results indicated that favorable non®nancial performance information was able to signi®cantlyin¯uence evaluation of the agencyand the individual more consistentlythan was unfa-vorable non®nancial performance information. And that non®nancial perfor-mance information had a more consistent impact on SCORE and MERIT than it did on ALLOC.
Finally, the analysis looked at the interaction of resource scarcity (SCARCE) with FIN and PERF. MANOVA indicated no signi®cant inter-action eects between SCARCE and FIN or PERF (Table 7, panel A), indi-cating no support for H3. The lack of a signi®cant interaction eect at the MANOVA level indicated that univariate analysis would result in an in¯ated type I error rate (Stevens, 1992, p. 152). Realizing that error rates may be in¯ated the following univariate analysis was conducted to explore possible relationships between resource scarcityand accounting measures. The only interaction (Table 7, panel B) of anyinterest was the impact of SCARCE on FIN (F3.65; p0.057, two-tail test). A graph of the interaction (Fig. 1) shows that, contraryto the expectation expressed in H3, when there was re-source scarcitythe use of FIN actuallydecreased. When FIN was favorable ALLOC was higher under no scarcitythan under scarcity. However, when FIN was unfavorable approximatelythe same level of ALLOC was awarded regardless of the SCARCE condition.
To further studythe eect of scarcityon the signi®cance of ®nancial and non®nancial information the dependent variable (ALLOC) was analyzed based on its component parts. MacManus (1993, p. 299) indicates that delaying capital expenditures is a popular cutback strategyin periods of ®scal stress. If this is true, subjects mayhave ®rst decreased capital expenditure requests be-fore evaluating other budget line-items, confounding the reported results. After separating capital allocations from ALLOC the analysis was again conducted. The results were essentiallythe same as those reported in Table 7. Finally, an analysis was conducted on the demographics of the subjects to ensure there were no systematic dierences between the scarcityand no scarcitysamples. Chi-square and t-tests indicated no signi®cant (alpha0.05, two-tail test) dierences between the samples.
4.4.3. Tests of assumptions
that the variables SCORE and MERIT had relativelynormal distributions with verylittle skew or kurtosis. Since the onlyviolation of normalitywas related to ALLOC, the distribution for MANOVA purposes was considered relativelynormal.20 The assumption of homoscedasticityis important in ANOVA and MANOVA analysis when sample sizes are unequal, since vio-lation of the assumption can have a serious eect on type I error rates, with actual alpha values being considerablyhigher than the tested values (Stevens, Table 7
Interaction of resource scarcitywith performance measuresa
Independent variable F-valueb df p-valuec R2
Panel A: multivariate test of hypothesis 3
FIN 4.07 1 0.008
PERF 25.11 2 <0.001
SCARCE 0.75 1 0.526
FIN*SCARCE 1.60 1 0.190 PERF*SCARCE 0.73 2 0.625
Panel B: univariate tests of hypothesis 3
Dependent variable
ALLOC 0.081
FIN 5.81 1 0.017
PERF 2.87 2 0.059
SCARCE 2.93 1 0.088
FIN*SCARCE 3.65 1 0.057 PERF*SCARCE 1.00 2 0.368
SCORE: 0.380
FIN 5.20 1 0.024
PERF 63.08 2 <0.001
SCARCE 0.02 1 0.885
FIN*SCARCE 0.04 1 0.833 PERF*SCARCE 0.19 2 0.830
MERIT 0.350
FIN 8.76 1 0.003
PERF 55.98 2 <0.001
SCARCE 0.01 1 0.934
FIN*SCARCE 1.61 1 0.206 PERF*SCARCE 0.40 2 0.668
a
See Table 5 for de®nition of terms.
b
F-values for multivariate analysis are based on Wilks' Lambda. Thep-values provided are for two-tailed probabilites.
c
p-values for the univariate tests are for two-tailed probabilities.
20The presence of kurtosis in the variable ALLOC is not expected to have a signi®cant eect on
1992, p. 258). A residual analysis showed that the dependent variables had relativelyhomogeneous variance. As a further analysis, a Box test was con-ducted.21The results indicated that at an alpha of 0.05 the null hypothesis that the treatment variances are equal could not be rejected for MERIT (F2.05; 5, 16335 df; two-tail test). The Box test was marginal for the variable SCORE (F2.33; 5, 14565 df; two-tail test). Finally, tests conducted indicated no in-¯uential observations.22
5. Conclusions and limitations
Due to the strong interest shown in increasing accountability, government entities are being encouraged to experiment with the inclusion of non®nancial performance measures in reports. This article looked at one group of users (government budget ocers) in an attempt to address whyusers maybe in-terested in non®nancial measures, whether the users will derive incremental bene®t from the inclusion of non®nancial measures in reports, and whether ®scal stress aects the use of ®nancial and non®nancial measures.
Fig. 1. From Table 7, the interaction eect of ®nancial information (FIN) and scarcity(SCARCE) on resource allocations (ALLOC). NSCno resource scarcity; SCresource scarcity.
21The Box test is sensitive to departures from normality(Neter et al., 1990, p. 618); therefore, the
ALLOC variable was not tested since it had alreadybeen determined that ALLOC suers from non-normality.
22In¯uential is de®ned as DFFITS' values in excess of 1 and COOKD's values in excess of 0.20
The principle±agent model was used to help explain whyusers are interested in disclosure of non®nancial information. I proposed that in a government setting, where there is no one outcome measure that can be used to assess the agent's eort, relative to the principal's objective, multiple measures are helpful in increasing the congruitybetween the agent's eort and the principal's ob-jective. Using the information provided bythe performance measures the principal is expected to reward/sanction the agent's eort.
To test the premises of the model three assessments of agent eort were conducted. Two of the assessments related to agent eort at the unit (agency) level and one assessment related to eort at the individual (manager) level. At the individual level both ®nancial and non®nancial performance measures were considered in evaluating and rewarding (compensating) the eort of the indi-vidual. In accordance with agencytheory, this suggests that if individual compensation is tied to individual eort both ®nancial and non®nancial measures should be used in evaluation.
The relationship between information and evaluation is more complex at the unit level. Generally, it was found that the two types of performance measures (®nancial and non®nancial) are used for dierent purposes. Financial measures were primarilyused to allocate resources while non®nancial measures were primarilyused to evaluate the overall performance of the unit. The results indicate that the addition of non®nancial measures did not add incremental value to budget allocation decisions, contraryto the perceived usefulness of such information (Poister and McGowan, 1984, p. 390; Grizzle, 1987, p. 34; Grizzle, 1993, p. 974; Chamberlain, 1990, pp. 78±87) and Reed's 1986 study.23 This does not mean that non®nancial information is unimportant. Non®nan-cial measures were used to assess overall performance of the department, and in fact, tended to displace ®nancial measures. These results maybe especially important for entities that are looking to increase eciencyand eectiveness while holding allocations constant.
The results indicate that budget ocers separate the agencyfrom manage-ment (individual). Additionally, budget ocers appear to separate ®nancial performance (compliance and ®nancial accountability) from non®nancial performance (eciencyand eectiveness accountability) and assess and reward according to the separation. If the budget ocers are using the various mea-sures to increase congruitybetween the agent's eort and the principal's ob-jective the provision of both ®nancial measures and non®nancial measures adds value to reports. Myresults held for all respondents including those
re-23In Reed's studysubjects awarded resources based on outcome and/or impact measures (Reed,
spondents who work for cities that use eciencyand eectiveness measures. While it was posited that one reason for non®nancial measures not being used to allocate resources related to a lack of congruence between the measure and the principal's objective it is also possible that contributing factors are the incremental nature of the budget process and/or the lack of reliable measures of eciencyand eectiveness. Of interest would be whether assurance (bya third partysuch as an independent auditor) concerning the reliabilityof non®nancial measures would increase the impact of non®nancial information on resource allocations.
Given the resource stress under which manygovernments operate, the study of resource scarcity's impact on use of ®nancial and non®nancial information is particularlyrelevent. The results indicated that the presence of scarcity(®scal stress) had little impact on the principals' decisions. In the one instance where ®scal stress mayhave impacted the use of ®nancial measures the result was contraryto expectations, and case research (DeMarco and Holley, 1984, p. 179). The presence of ®scal stress actuallydecreasedthe use of ®nancial mea-sures. These results support Berg's (1984, p. 78) argument that the presence of scarcityimpedes rational behavior. Berg (1984, p. 79) argues that scarcity creates a zero-sum environment. That is, while agents mayhave engaged in cooperative strategies in hopes of future gains under a no scarcityenvironment, there is zero to be gained byengaging in such strategies in a scarcityenvi-ronment. Budget ocers, realizing that cooperation among agencies will de-crease during scarcitymayimplement across-the-board adjustments to limit con¯ict, thus reducing time spent and reputation costs incurred in arriving at a budget. Based on the argument byBerg (1984, p. 79) and the results of this article, a government contemplating incorporation of costlyeciency /eec-tiveness measures into reports may®nd the measures will gain greater accep-tance and cooperation if implementation does not occur during periods of ®scal stress. This observation is also supported bya comment (Poister and McGowan, 1984, p. 392) that managers of stressed cities indicated that the importance of performance indicators would be greater if stress were not such an important factor.
The experimental scenario provides onlya subset of information, focusing attention on those variables of interest to me. Additionally, this article does not speci®callyaddress power politics. Power politics refers to the in¯uence of an agent/principal relative to other individuals involved in the allocation process (Mueller, 1989, p. 248). The scenario has focused attention on a particular department in a particular city, as such it is unclear whether the results of this studywould generalize to a less discretionarydepartment, or one from which the respondents would receive a more direct bene®t, such as a police depart-ment.
This article adds to the descriptive and case research that has been con-ducted on the importance of non®nancial performance information. Currently, there is verylittle empirical research (Reed, 1986; Schrader, 1995) assessing the value of non®nancial information. Byexamining the incremental value of in-cluding non®nancial performance information in reports, the results in this article indicate that non®nancial information is revelant to users. However, this article re¯ects that non®nancial performance information maynot signi®cantly aect funding decisions when ®nancial information is available. Additional research that looks at the relationship between ®nancial and non®nancial in-formation would be helpful. For example, would the impact of non®nancial information signi®cantlyaect funding decisions if the non®nancial informa-tion were part of compliance accountability, as is ®nancial budgetary infor-mation? Would the impact of non®nancial information change if assurance was provided on non®nancial information as well as ®nancial information?
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