JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH American Accounting AssociationVol. 24 DOI: 10.2308/jmar-502022012pp. 159–175

The Mediating Effect of Psychological Capitalon the Budget Participation-Job Performance

Relationship

Roopa VenkateshJennifer Blaskovich

University of Nebraska at Omaha

ABSTRACT: This study draws from the literature in positive psychology and

organizational behavior to examine the role of an individual’s psychological capital

(PsyCap) on the budget participation-job performance relationship. PsyCap is an

emerging construct that represents an individual’s positive state of psychological

development, and is characterized by the individual’s hope, efficacy, optimism, and

resiliency. We surveyed 109 employees working in organizations across the United

States who are actively involved in the budget-setting process or have budgetary

responsibilities. The results of a mediation analysis show that budget participation is

significantly and positively associated with employees’ levels of PsyCap, which is in turn

significantly and positively associated with higher levels of job performance. Supple-

mental analysis using a structural equation modeling technique also supported the

hypotheses of this study.

Keywords: budget participation; positive psychology; psychological capital; PsyCap.

INTRODUCTION

Organizations allow employees to participate in the budget-setting process expecting, but

not always achieving, positive outcomes such as a greater level of job performance or job

satisfaction (Argyris 1952; Becker and Green 1962; Chenhall and Brownell 1988; Kren

1992; Douglas and Wier 2000; Covaleski et al. 2003; Marginson and Ogden 2005; Sheely and

Brown 2007). However, the extant literature in managerial accounting has failed to establish a

direct relationship between budget participation and job performance, reporting positive, negative,

and insignificant results (Murray 1990). Researchers have nevertheless maintained the notion that

involving employees in the budget-setting process should positively influence their performance

(Argyris 1952; Murray 1990; Chong and Chong 2002), and have attributed the inconsistent

empirical results to inadequacies in the theoretical framework(s) adopted by prior research (Ronen

and Livingstone 1975; Ferris 1977; Brownell and McInnes 1986; Kren and Liao 1988; Murray

1990; Chong and Chong 2002; Covaleski et al. 2003).

We are grateful for the Institute of Management Accountant (IMA) Foundation for Applied Research (FAR) grant forsupport with the data collection.

Published Online: May 2012

159

Consequently, psychology-based researchers have proposed an intervening-variables model,

which suggests that individuals’ mental states intervene between budgeting and performance

(Covaleski et al. 2003). Studies following this path examine motivational factors that mediate the

participation–performance relationship (Nouri and Parker 1998; Shields et al. 2000; Covaleski et al.

2003; Sheely and Brown 2007). To add to this literature, we draw from theory and research in

positive psychology to examine the role of a psychological variable with a motivational propensity

that has not yet been introduced in a budget participation context, called psychological capital

(PsyCap) (Luthans et al. 2007b). We investigate whether budget participation strengthens

employees’ positive mental states, and whether such strengthened positive mental states result in

enhanced job performance. We capture employees’ positive mental states through their levels of

PsyCap, and propose that it plays a mediating role in the participation–performance relationship.

PsyCap is defined as ‘‘an individual’s positive state of psychological development that is

characterized by (1) having confidence (efficacy) to take on and succeed at challenging tasks; (2)

making a positive attribution (optimism) about succeeding now and in the future; (3) persevering

toward goals, and when necessary, redirecting paths to goals (hope) in order to succeed; and (4)

when beset by problems and adversity, sustaining and bouncing back and even beyond (resiliency)

to attain success’’ (Luthans et al. 2007b, 3). PsyCap focuses on developing and building on

individuals’ strengths instead of concentrating on reducing or eliminating individuals’ weaknesses.

The study of PsyCap is gaining prominence in the organization sciences, and research in

organizational behavior provides evidence that PsyCap is a core construct that predicts performance

better than any one of the individual strengths that make it up (Luthans et al. 2008; Gooty et al.

2009). We hypothesize that higher levels of budget participation are associated with higher levels of

PsyCap and higher levels of PsyCap are associated with higher levels of job performance.

We surveyed 109 employees or managers working in organizations across the United States who

are actively involved in the budget-setting process or have budgetary responsibilities. The results

show that budget participation is significantly and positively associated with employees’ levels of

PsyCap, which in turn is positively associated with higher levels of job performance. The same results

were found when a structural equation modeling technique was used as supplementary analysis.

Our work contributes to the literature in budgeting and budget participation. We identify a

mental state associated with positive outcomes, PsyCap, and provide initial empirical evidence on

its role as a mediating link between budget participation and performance. This supports the

intervening-variables literature, which assumes that budgeting influences mental states and,

consequently, behavior. On a broader scale, we add to the growing literature on positive psychology

in the workplace. Although such research has established a relationship between positivity and

outcomes (e.g., Bandura 2008), ours is the first to suggest PsyCap as a theoretical mechanism

relating positivity to budgeting and performance. This addresses calls for research to examine the

‘‘positive’’ aspects of budgeting and the potential for budgets to play a more functional role in

individuals’ work-related experiences (e.g., Marginson and Ogden 2005). Finally, we answer

scholarly calls for research using alternate theories to examine the motivational effects of budget

participation (e.g., Chong and Chong 2002).

The results reported herein also have the potential to inform practitioners about improving

business performance. The contemporary workplace is experiencing changes at a more dramatic

pace than ever before (Larson and Luthans 2006). In such an environment, we expect the results to

inform managers about the extent to which budget participation has the potential to build

employees’ strengths to perform successfully at challenging tasks, instead of focusing on the

dysfunctional behaviors associated with budget participation.

This paper is organized as follows. The next section discusses the prior literature and

theoretical foundation for our research hypotheses, followed by the research method and results.

The paper concludes with a discussion of the results and opportunities for future research.

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HYPOTHESES DEVELOPMENT

Psychology-based research in budgeting has focused on the effect of practices such as

participation on employees’ mental states, their behavior, and performance (Covaleski et al. 2003).

Consistent with prior research, we define budget participation as a process in which an employee is

involved with, and has influence on, the determination of his/her budget (Shields and Shields 1998;

Chong and Chong 2002). Ideally, participation should motivate employees to improve their job

performance (Argyris 1952). Although substantial effort has been devoted to studying the

motivational role of budget participation on job performance, the effect has been shown to be

positive, negative, and insignificant (see Shields and Shields [1998] for a review). In an attempt to

explain the inconsistencies, researchers have proposed and developed an intervening-variables

model, which presumes that individuals’ mental states mediate the relationship between

participation and performance (Covaleski et al. 2003). Studies in this vein have found support

for several intervening variables, including stress (Shields et al. 2000), resource adequacy and

organizational commitment (Nouri and Parker 1998), and goal commitment and fairness

perceptions (Wentzel 2002). These variables, however, focus on alleviating employees’ negative

mental states during the budget participation process. Although these factors remain important,

researchers in the positive psychology movement suggest a need for a more balanced focus

(Luthans et al. 2008).

The positive psychology movement is centered on the positive qualities in individuals—their

strengths, wellness, and prosperity (Seligman 1998). A growing body of work in this area

demonstrates that people flourish when we focus on what is right with them, rather than on fixing

what is wrong (e.g., Nelson and Cooper 2007; Wright 2003; Fredrickson 1998, 2000). Positive

psychology in the workplace is termed positive organizational behavior (POB). POB is ‘‘the study

and application of positive-oriented human resource strengths and psychological capacities that can

be measured, developed, and effectively managed for performance improvement’’ (Luthans 2002b,

59). PsyCap, derived from POB, is a state-like, higher-order construct made up of four dimensions

that underlie an individual’s mental state: hope, efficacy, resiliency, and optimism (Luthans et al.

2008). A fair amount of research in POB has examined the role of PsyCap in organizational

contexts, and has found PsyCap to have a significant positive influence on employees’ job

performance, job satisfaction, and organizational citizenship behaviors, when supportive

organizational contexts exist (e.g., see Luthans et al. 2008; Avey et al. 2009).

Psychological Capital and Budget Participation

The literature in positive psychology (Snyder 2000, 2002) and POB (Luthans et al. 2007a)

clearly differentiates the four individual dimensions that comprise PsyCap, and provides evidence

for the discriminant validity among them. Moreover, since PsyCap is considered a state-like

construct and is open to development (e.g., Luthans and Youssef 2007; Avey et al. 2009; Bandura

1997; Snyder 2002; Masten and Reed 2002; Carver and Scheier 2002; Seligman 1998), budget

participation is conducive to developing and increasing an employee’s level of PsyCap. Unlike

traits, which are generally stable individual differences, state-like constructs capture changes based

upon situational or contextual factors such as budget participation.

Self-Efficacy

Self-efficacy is defined as one’s confidence in his/her ability to accomplish a task (Luthans et

al. 2008). The most effective approach to developing employees’ self-efficacy is to allow them to

experience success, or ‘‘mastery experiences’’ (Bandura 1997). In order for employees to

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experience this, they need to work toward self-set, challenging but achievable, specific goals

(Luthans and Youssef 2004).

While participating in the budget-setting process, individuals will have influence over setting

challenging but achievable, specific goals. Budget participation is conducive for individuals to

interact with their superiors at work and experience task mastery, and engage in social persuasion

and feedback, which are important sources of efficacy from Bandura’s (1997) widely accepted

taxonomy. Participation allows individuals the opportunity to receive encouragement from their

supervisors as they work toward their self-set budgets, which can build their confidence to perform

successfully and achieve their budgets. Thus, we expect that higher levels of budget participation

will be associated with higher levels of self-efficacy.

Hope

Hope is a context-specific, motivational state based on the interaction between three factors:

goals, willpower (agency), and waypower (pathways) (Snyder et al. 1996; Snyder 2000, 2002;

Luthans and Youssef 2004). Agency is the motivation (the will) to accomplish a task, and the

pathway is the means (the way) to do so. The agency and pathways dimensions interact in an

iterative manner to generate and enrich hope in an individual. The pathways or waypower

dimension of hope distinguishes it from the other three PsyCap dimensions (Luthans and Jensen

2002; Luthans et al. 2004a; Luthans et al. 2004b; Luthans and Youssef 2004; Luthans et al. 2007b;

Avey et al. 2009). It signifies one’s motivation to put in the effort to generate workable routes to

attain desired goals. Although there are conceptual similarities between hope and self-efficacy, self-

efficacy represents one’s confidence in his/her abilities to take on a task, while hope represents

one’s motivation to put in the effort and plan the path to success (Luthans et al. 2008; Avey et al.

2009).

Initiatives such as budget participation are necessary for developing an individual’s level of

hope, because they allow an individual to view him/herself as being in control of his/her own and

the organization’s present and future. Participatory work environments that allow employees to set

goals and create targets toward which they can direct their agency (willpower) and pathways

(waypower) have been effective in nurturing and developing employees’ levels of hope (Luthans

and Youssef 2004). Therefore, employees or managers who actively participate in the budget-

setting process should have higher levels of hope, allowing them to remain committed to attaining

their goals and planning the pathways to do so.

Optimism

Optimism draws from attribution theory and is an individual’s style of explaining good or bad

events (Luthans et al. 2008; Gooty et al. 2009). Specifically, optimists interpret bad events as being

only temporary and pessimists interpret bad events as being permanent (Luthans and Youssef

2004). In the workplace, employees’ levels of optimism can be developed when managers and

employees accept their past failures and setbacks, and forgive themselves for mistakes that they can

no longer reverse. Organizations that use approaches that encourage employees to have an

appreciation for the present, including both the things that they can control and those they cannot,

provide a conducive work environment for developing employees’ levels of optimism. Further,

employees’ levels of optimism can also be developed when they are encouraged to view

uncertainties in the future as opportunities for growth and advancement, and embrace them with a

positive attitude (Luthans and Youssef 2004).

Budget participation is a practice characterized by interpersonal relations between the

supervisor and the employee. Supervisors are in a position to influence employees’ favorable

assessments of good or bad events. Organizations employ budget participation to provide an

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optimistic and encouraging work environment for their employees (Argyris 1952; Covaleski et al.

2003). Therefore, the budget participation process is conducive to developing employees’ optimism

in the workplace, and we expect that higher levels of budget participation should be associated with

higher levels of optimism.

Resiliency

Drawing from the work of positive psychologist Ann Masten, PsyCap resilience is defined as

‘‘the developable capacity to rebound or bounce back from adversity, conflict, failure, or even

positive events, progress, and increased responsibility’’ (Luthans 2002a, 702). Resiliency is

activated by an antecedent stressor, which can be either positive or negative, and encompasses the

adaptation processes that employees use in situations of uncertainty or risk.

Organizations can develop employees’ resiliency with the use of asset-focused strategies, such

as emphasizing and enhancing resources that increase the probability of positive outcomes despite

the presence of risks (Luthans and Youssef 2004; Luthans et al. 2007a). O’Sullivan (2010)

recounts how budget participation practices at several organizations focused employees’ mindsets

on positive outcomes during the depths of the recent recession. Despite fears of layoffs or

bankruptcy, participation motivated their efforts toward a successful result. Further, Peterson et al.

(2011) suggest that supervisors can build resiliency by providing a mechanism for subordinates to

make decisions regarding their performance. Budget participation is an example of such a

mechanism, and accordingly we expect that it facilitates the development of employees’ levels of

resilience.

In sum, we propose that budget participation will provide a positive psychological context for

employees to set challenging but achievable goals, a belief in accomplishing them and overcoming

adversity, and a belief in a positive future. Budget participation is a contextual condition that is

conducive for creating the positive conditions necessary to increase employees’ levels of PsyCap.

PsyCap as a Core Construct

As noted by Avey et al. (2009, 9), ‘‘although the four constituents of PsyCap share a common

capacity of internalized agency, motivation, perseverance, and success expectancies, the extent of

workplace influences, and the adaptational mechanisms and goal achievement processes, vary

across the four capacities, making each capacity’s contribution unique to the multidimensionality of

PsyCap.’’ For instance, the waypower dimension of hope enables an efficacious person to build the

propensity to develop alternative pathways to accomplish self-set goals. Thus, hope can add

substance or more pathways to consider, for the internalized motivation, perseverance, and positive

expectancies of efficacious individuals, and enhance their levels of self-efficacy.

PsyCap self-efficacy and hope share positive expectancies about the future which are related to

a specific goal and are internalized and attributed to one’s effort and motivation (Avey et al. 2009).

Although optimism shares positive expectancies about the future with self-efficacy and hope, it is

unique in that it may incorporate all aspects of a situation, while efficacy and hope tend to be related

to a specific goal. For example, in a work environment such as a budget participation context,

managers will have the opportunity to influence employees’ favorable assessments of good or bad

events, and could potentially influence them to externalize negative events and attribute them to

situational factors. Such an optimistic explanatory style of externalizing negative events should

alleviate any negative impact bad events could have on self-efficacy and hope that have already

been developed during budget participation. Resilience and efficacy share an underlying

perseverance component that encourages individuals to work toward their goals in the face of

obstacles. Resilient individuals are able to adapt even to situations characterized by obstacles

because they have the ability to draw on the appropriate assets (e.g., cognitive skills, social,

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financial, affective, and other resources) to overcome obstacles. The effectiveness of such

adaptational processes is vital to resilience in the same manner that the process of generating

alternate pathways is essential for the existence and enhancement of hope.

The PsyCap constituents of hope, optimism, and resilience therefore have the potential to

enhance a person’s level of self-efficacy to succeed at a specific task. Efficacy, a key component of

PsyCap, has been widely examined by researchers in psychology and organizational behavior.

Stajkovic and Luthans (1998) conducted a meta-analysis of 114 studies and examined the

relationship between self-efficacy and workplace performance. The results of their study indicate a

significant weighted mean correlation of 0.38 between self-efficacy and workplace performance,

indicating that efficacy is an important factor in improving job performance. Thus, the combined

influence of the internalized agency, motivation, perseverance, and success expectancies

contributed by each of the four PsyCap constituents have the potential to enhance an employee’s

level of job performance to a greater extent than each of them would individually.

Several studies in the organizational behavior literature (Luthans et al. 2005; Larson and

Luthans 2006; Luthans et al. 2007a; Luthans et al. 2008; Gooty et al. 2009; Luthans and Avolio

2009) have found PsyCap as a core construct to be significantly and positively related to job

performance. More importantly, recent research in organizational behavior has found that PsyCap

was best measured as a core construct, where each of the four dimensions load onto the overall

PsyCap core construct. This research has demonstrated that PsyCap consists of the shared variance

of efficacy, hope, optimism, and resilience, and that PsyCap as a core construct was more

consistently related to performance than each of the four dimensions individually (Luthans et al.

2007a; Avey et al. 2009). There is also evidence to support the expectation that PsyCap represents

an intervening variable in an organizational practice–performance context. Luthans et al. (2008)

examined the influence of PsyCap on the relationship between supportive organizational climate

and performance, and found evidence that PsyCap fully mediates this relationship. We propose an

indirect effect of participation on performance through PsyCap. Thus, the following hypotheses,

stated in the alternative form, are tested:

H1a: Higher levels of budget participation are associated with higher levels of individual

PsyCap.

H1b: Higher levels of individual PsyCap are associated with higher levels of individual job

performance.

Figure 1 represents the theoretical model of the study.

FIGURE 1Theoretical Model

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RESEARCH METHOD

Participants

Employees at different levels, from chief financial officer to accounts payable clerks, are

involved in or participate in the budget-setting process to some extent (Sheely and Brown 2007).

Therefore, we invited employees or managers—who currently occupy low-, mid-, or upper-level

positions; have held these positions for at least two years; and have budgetary responsibilities—to

participate. An online survey gathered data regarding individuals’: (1) budget participation, (2) job

performance, (3) PsyCap, and (4) demographic data.

The survey was sent to 2,500 employees working in a variety of industries in the United States

with the main criteria being that individuals be involved in the budgeting process. The Institute of

Management Accountants distributed an invitation to participate in the survey to its regular U.S.

members, excluding academics, students, and consultants. Of the 133 individuals who began the

survey, we received 109 completed, usable responses. This response rate (5 percent) is likely due to

the fact that practicing employees comprise the participant pool (high opportunity costs) and the

general decline in survey response rates over the last decade (Sax et al. 2003; Gassen and

Schwedler 2010). However, the absolute number of responses and the ability to survey practicing

employees provides meaningful evidence on the participation–performance relationship. Partici-

pants’ average age was 40.47 years (s.d.¼ 14.04), and average tenure in their current positions was

just over four years (s.d. ¼ 4.23). Additional demographic information is presented in Table 1.

Measures

Job Performance (Dependent Variable)

We used a self-rated measure of performance (Mahoney et al. 1965) that has been used

effectively in prior budget participation research (e.g., Brownell and McInnes 1986; Govindarajan

1986; Kren 1992). Individuals were asked to rate themselves on eight dimensions of performance:

planning, investigating, coordinating, evaluating, supervising, staffing, negotiating, and represent-

ing. Following Kren (1992), an overall measure of performance was also included. The eight sub-

scale items were summed up and averaged to construct a composite performance scale. The

combined scale was significantly correlated (r ¼ 0.682; p , 0.01) with the overall performance

rating. Following Kren (1992), this provides support for the combined scale as a reasonable

measure of job performance, and thus we use the combined scale in our statistical testing.1

Psychological Capital

The PsyCap questionnaire (PCQ) (Luthans et al. 2007b) we used has been found both reliable

and predictive of performance across diverse samples (Luthans et al. 2008). The PCQ is drawn from

four standard measures: (1) hope (Snyder et al. 1996); (2) resiliency (Wagnild and Young 1993);

(3) optimism (Scheier and Carver 1985); and (4) self-efficacy (Parker 1998). Each of the original

standardized scales has considerable psychometric support, and has been used in previous

workplace studies alone (Peterson and Luthans 2003) and in combination (Luthans et al. 2005;

Luthans et al. 2007a; Luthans et al. 2008). After reverse-scoring responses to the appropriate

questions, responses to each of the four subscales were summed and averaged to determine a

subscale composite. Then, the averages for each of the four subscales were added together and

averaged to get a composite average for each participant’s PsyCap score.

1 Participants’ responses of ‘‘not applicable’’ on this instrument were not included in the analysis.

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Budget Participation

A three-item version of a participation measure employed by Milani (1975) and used

effectively in prior budgeting research (Kren 1992) was used. We calculated an overall measure of

budget participation by averaging the responses to the three individual items.

ANALYSIS AND RESULTS

Given that PsyCap is a relatively new construct not yet addressed in the accounting literature,

we strictly follow the lead of Luthans and his colleagues (e.g., Luthans et al. 2008) for our statistical

analysis. Table 2 presents the means and standard deviations, and Table 3 shows the correlations of

the variables. The results in Table 3 show that Participation is positively related to PsyCap (r ¼0.520; p , 0.01), Participation is positively related to Performance (r ¼ 0.360; p , 0.01), and

PsyCap is positively related to Performance (r ¼ 0.449; p , 0.01). The results most importantly

show that PsyCap has a significantly positive role in the participation–performance relationship and

support H1a and H1b.

TABLE 1

Demographic Statistics

Panel A: Personal Information, Education, and Work Experience

n Mean Standard Deviation Range

Age 109 40.47 14.04 24–62 years

Years in current position, firm 102 4.25 4.23 1–24 years

Years in similar position, all firms 94 9.19 8.50 0–35 years

Years involved in budgeting 100 5.55 5.51 1–30 years

Gender 103 Female ¼ 39%

Male ¼ 60%

Highest degree attained 103 Bachelor’s ¼ 39%

Master’s ¼ 61%

Type of degree 103 Business ¼ 97%

Other ¼ 3%

Panel B: Percentage of Participants from Different Industries

Industries n Percentage

Manufacturing 24 22%

Governmental/Not-for-Profit 13 12%

Accounting 10 9%

Utilities/Mining/Energy 9 8%

Other Service 9 8%

Technology 8 7%

Financial Services/Banking 7 6%

Retail/Distribution 6 6%

Construction/Transportation 5 4%

Consulting 5 5%

Health Care 5 5%

Education 3 3%

Other/No Response 5 5%

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Following Baron and Kenny’s (1986) technique, we estimated three regression equations to

test the hypotheses. In the first equation the dependent variable (Performance) was regressed on the

independent variable (Participation). In the second equation, the mediating variable (PsyCap) was

regressed on the independent variable (Participation). In the third equation, the dependent variable

(Performance) was regressed on both the independent variable (Participation) and the mediating

variable (PsyCap).

According to Baron and Kenny (1986), there is support for mediation if a significant

relationship is found for the first two equations, if the third regression shows that the mediating

variable is related to the dependent variable, and if the relationship of the independent variable with

the dependent variable is lower in magnitude than in the second equation. Further, in order to find

support for full mediation, the independent variable (Participation) should not relate to the

dependent variable (Performance) when the mediating variable (PsyCap) is added to the equation.

Table 4 shows the regression results for the tests of mediation with bootstrap standard errors.

The results in Table 4 show that the regression coefficient for Participation is significant when

Performance is regressed on Participation in Equation (1) (b ¼ 0.360, p ¼ 0.000). The regression

coefficient for Participation is significant when PsyCap is regressed on Participation (b¼ 0.520, p¼0.000) in Equation (2). Further, when Performance is regressed on both PsyCap and Participation,

PsyCap is the only variable that contributes significantly to the equation (for PsyCap, b¼0.358, p¼0.001). More importantly, the relationship between Participation and Performance becomes

TABLE 2

Descriptive Statisticsn ¼ 109

VariableMean

(Median)StandardDeviation

Actual[Theoretical]

Range

Performance 5.396 0.924 3.14–7.00

(6.00) [1.00–7.00]

Overall Performance 5.752 1.179 1.00–7.00

(5.43) [1.00–7.00]

Budget Participation 4.969 1.704 1.00–7.00

(5.33) [1.00–7.00]

PsyCap 4.834 0.577 2.67–5.75

(4.79) [1.00–6.00]

TABLE 3

Correlation Matrix for Variables

Variables PerformanceOverall

PerformanceBudget

Participation PsyCap

Performance 1

Overall Performance 0.682** 1

Budget Participation 0.360** 0.246** 1

PsyCap 0.449** 0.344** 0.520** 1

** Correlation is significant at the 0.01 level (two-tailed test).

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statistically insignificant when PsyCap is added to the equation (b ¼ 0.173, p ¼ 0.087), showing

support for full mediation. Figure 2 shows the results for the mediating effect of PsyCap. Thus,

there is strong support for H1a and H1b.2

Supplemental Analysis: Structural Equation Modeling

We also conducted a latent variable Structural Equation Modeling (SEM) technique to test the

hypothesized linkages of the theoretical model in this study. The SEM technique allows us to

simultaneously test the linkages in the structural model, and takes into account measurement error.

First, the measurement model was evaluated by confirmatory factor analysis. The measurement

model assessed whether all items in a given scale represented the same latent factor. A value greater

than 0.90 for the comparative fit index (CFI) and a value less than 0.10 for the standardized root

mean square residual (SRMR) are generally considered favorable and indicate reasonably good fit

(Hu and Bentler 1999; Kline 2005).

Our measurement model consists of two factors, Participation and PsyCap. The CFA revealed a

good fit (SRMR ¼ 0.063 and CFI ¼ 0.944). Item loadings for the three-item budget participation

scale ranged from 0.875 to 0.880 and were significant. Each of the four dimensions of PsyCap

significantly loaded on the overall PsyCap factor as follows: efficacy ¼ 0.679, hope ¼ 0.898,

optimism ¼ 0.709, and resilience ¼ 0.797.

We analyzed the structural model and relied on the standardized estimates with bootstrap

standard errors. The results are presented in Table 5 and Figure 3. Consistent with our expectations,

the standardized estimate between Participation and PsyCap is positive and statistically significant

(estimate¼ 0.545, p , 0.05). Thus, H1a, which states that higher levels of budget participation are

associated with higher levels of individual PsyCap, is supported. Furthermore, the standardized

estimate between individual PsyCap and Performance was positive and statistically significant

TABLE 4

Tests for Mediation Effect—Regression Results

StandardizedCoefficient b t-statistic

BootstrapStandard

Error

Equation (1)

Budget Participation 0.360 3.988* 0.047

Equation (2)

Budget Participation 0.520 6.304* 0.036

Equation (3)

Budget Participation 0.173 1.728 0.053

PsyCap 0.358 3.575* 0.186

* Significant at p , 0.05.For Equation (1): R2 ¼ 0.129, Dependent Variable ¼ Performance, F ¼ 15.905. Sig. ¼ 0.000.For Equation (2): R2 ¼ 0.271, Dependent Variable ¼ PsyCap, F ¼ 39.741, Sig. ¼ 0.000.For Equation (3): R2 ¼ 0.223, Dependent Variable ¼ Performance, F ¼ 15.218, Sig. ¼ 0.000.

2 We reanalyzed our results controlling for respondent characteristics, including industry, tenure in current position,tenure in similar positions, age, and gender. We also performed a median split on Budget Participation todetermine if respondents’ levels of budgetary responsibility or authority is driving the findings. Results were notsignificant. We thank an anonymous reviewer for these suggestions.

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(estimate ¼ 0.345, p , 0.05). Thus, H1b, higher levels of individual PsyCap are associated with

higher levels of individual job performance, is supported. The overall indirect effect of Participation

on Performance through PsyCap is positive and statistically significant (estimate ¼ 0.188, p ,

0.05), suggesting that PsyCap plays a mediating role in the participation–performance relationship.

The standardized estimates between Participation and each of the PsyCap dimensions are also

positive and statistically significant as shown in Table 5 and Figure 3. We conducted a statistical

power test to determine the appropriate sample size based on the procedures by Muthen and

Muthen (2002). The results show that our sample size is appropriate, as a statistical power of 0.818

was obtained.3

DISCUSSION AND CONCLUSIONS

This study aims to provide empirical evidence about the relationship between budget

participation, PsyCap, and job performance. As predicted, our findings indicate that budget

participation is positively associated with PsyCap and that PsyCap is positively associated with

performance. We also find support for the indirect effect of budget participation on job performance

through PsyCap. Further, we use a structural equation modeling technique as supplemental analysis

and find additional support for our hypotheses.

Our study adds evidence to the recent stream of budgeting literature that employs an

intervening-variables model to explain the unexpected and inconsistent results of prior research on

the motivational effects of budget participation. Rather than assuming a direct or interactive effect

of budgeting and behavior, this approach assumes that budgeting influences mental states, which in

turn influence behavior (Covaleski et al. 2003). Different mental states have different effects on

behavior, resulting in a positive association between budgeting and performance in some cases and

a negative one in others. The goal is to identify the mental states associated with positive outcomes

and design organizational practices to develop them. Our study contributes to this literature by

FIGURE 2Results of Tests of Mediation

* Significant at p , 0.05.

3 To address the possibility that PsyCap acts as a moderator rather than a mediator, we followed therecommendations of Baron and Kenny (1986) and Frazier et al. (2004) for the continuous variable case. Weperformed a hierarchical regression analysis in which the predictor is entered in the first block, and the interactionproduct of the predictor and possible moderator are entered in the second block of the regression model. Theinteraction term was not significant, indicating that an existing level of PsyCap does not explain the variation inparticipation–performance relationship. We thank an anonymous reviewer for this suggestion.

The Mediating Effect of Psychological Capital on the Budget Participation 169

Journal of Management Accounting ResearchVolume 24, 2012

identifying a mental state associated with positive outcomes, PsyCap, and providing initial

empirical evidence on its role as a mediating link between budget participation and performance.

Beyond this contribution, our study introduces a psychological variable rooted in positive

psychology and POB to test the motivational effects of budget participation. PsyCap is an

outgrowth of the positive psychology movement, which focuses on the development of individuals’

strengths rather than their dysfunctions. This is in contrast to much of the prior budget participation

research, which has focused on the negative consequences of participation (e.g., slack, gaming).

TABLE 5

Results of Structural Equation Modeling (SEM)Theoretical Model of the Indirect Effect of Budget Participation on Performance through

PsyCap

Influence of Effects Estimate

BootstrapStandard

Error

Estimate/Standard

Error p-value

Budget Participation�PsyCap 0.545 0.080 6.825 0.000

Effect of Budget Participation on:

Self-Efficacy 0.370 0.068 5.418 0.000

Hope 0.490 0.074 6.597 0.000

Resilience 0.435 0.071 6.145 0.000

Optimism 0.387 0.068 5.691 0.000

Effect of PsyCap on Performance 0.345 0.109 3.148 0.000

Indirect Effect of Budget Participation

on Performance through PsyCap

0.188 0.067 2.790 0.005

FIGURE 3Results of Structural Equation Modeling (SEM)

Theoretical Model of the Indirect Effect of Budget Participation on Performance throughPsyCap

* Significant at p , 0.05.

Effect of BP on Performance through PsyCap is 0.188 and is significant at p , 0.05.

170 Venkatesh and Blaskovich

Journal of Management Accounting ResearchVolume 24, 2012

Although these aspects remain important, the study of positivity in workplace contexts intends to

shift the focus to a more balanced understanding of what is also right with people, and how it can be

developed (Luthans et al. 2008). Our study suggests PsyCap as a theoretical mechanism relating

positivity to budgeting and performance.

We acknowledge several limitations of this study. First, PsyCap is an emerging construct that

remains open to refinement. The positive psychological constructs of hope, resiliency, optimism,

and self-efficacy have been theoretically and empirically validated to meet the criteria of the core,

higher-order construct. It is possible that other constructs may be included in the future. Second, we

rely solely on the psychology-based literature on budgeting to motivate our study, despite

Covaleski et al.’s (2003) call for the use of integrated theories in budgeting research. Due to the

emerging nature of PsyCap and its roots in positive psychology, it is unclear how the construct may

relate to economic and sociologic theories of budgeting. Future research may investigate the

potential integrations of PsyCap with economic and sociologic variables. Relatedly, it is impossible

to capture all individual and contextual variables in one study. The measures are drawn from

well-established prior literature, but caution should be used in generalizing the results to all

participation contexts. Third, the response rate (5 percent in total, 4.5 percent useable) is low.

However, the access to practicing employees and the absolute number of responses provides valid

data with which to analyze our hypotheses, while setting the stage for more complex studies.

Fourth, the use of a self-rating of job performance may result in a leniency error or upward personal

bias. Although we followed prior research in our measure, this will reduce the objectivity of the

data. Perceptual measures, such as PsyCap and self-reported job performance, must be viewed

cautiously. It is reasonable to expect that when PsyCap is high, perception of job performance may

also be high. Future studies that include direct superiors’ ratings for subordinates’ performance will

minimize the bias. Additionally, experimental research and field studies may allow us to capture

richer data and ensure greater external validity.

Despite these limitations, the present study offers several implications for researchers and

managers. We provide initial evidence in an accounting context of an emerging construct that is

garnering a great deal of attention in organizational behavior, leadership, and management

disciplines. Additionally, we demonstrate a positive consequence of budgetary participation to

counter the negative behavior documented in some prior research. Given that PsyCap represents a

relatively new development, it is a fertile area for research. For managers, we document a

mechanism through which budget participation can be used to improve employee performance.

PsyCap is a concept that ‘‘organizations can invest in and develop in their workforce to achieve

veritable, sustained growth and performance’’ (Luthans et al. 2008, 224). Given the increasing

pressure of a global economy, organizations may wish to explore the benefits of PsyCap and its role

in the participation–performance relationship.

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APPENDIX A

Instrument

The following page of the survey is concerned with aspects of your performance. Please rate

your performance as a manager or an employee on the following tasks, Question #1–Question #8. It

is important that you answer all of the questions to the best of your ability. Consider only the

performance objectives from 1 through 8. You will be able to respond about your overall

performance in Question #9.

Response anchors: 1 ¼ well below average performance, 2 ¼ somewhat below average, 3 ¼slightly below average, 4¼ average, 5¼ slightly above average, 6¼ somewhat above average, 7¼well above average, 8 ¼ not applicable.

1. Planning:

2. Investigating:

3. Coordinating:

4. Evaluating:

5. Supervising:

6. Staffing:

7. Negotiating:

8. Representing:

Overall Performance:

9. Rate your overall performance:

Please answer these questions concerning your attitudes and perceptions about the workenvironment. Below are statements with which you may agree or disagree. Using the following

scales, indicate your level of agreement or disagreement.

Response anchors: 1¼ strongly disagree, 2¼moderately disagree, 3¼mildly disagree, 4¼ neutral,

5¼ mildly agree, 6 ¼ moderately agree, 7 ¼ strongly agree.

1. I am involved in setting all portions of my budget.

2. My budget is not final until I am satisfied with it.

3. My opinion is an important factor in setting my budget.

Please answer these questions concerning aspects of your personality. It is important thatyou try to answer each question frankly and honestly.

Response anchors: 1¼ strongly disagree, 2¼disagree, 3¼ somewhat disagree, 4¼ somewhat agree,

5¼ agree, 6 ¼ strongly agree.

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4. I feel confident analyzing long-term problems to find a solution.

5. I feel confident in representing my work area in meetings with management.

6. I feel confident contributing to discussions about the company’s strategy.

7. I feel confident helping to set targets/goals in my work area.

8. I feel confident contacting people outside the company (e.g., suppliers, customers) to

discuss problems.

9. I feel confident presenting information to a group of colleagues.

10. If I should find myself in a jam at work, I could think of many ways to get out of it.

11. At the present time, I am energetically pursuing my work goals.

12. There are lots of ways around any problem.

13. Right now I see myself as being pretty successful at work.

14. I think of many ways to reach my current work goals.

15. At this time, I am meeting the work goals that I have set for myself.

16. When I have a setback at work, I have trouble recovering from it and moving on.

17. I usually manage difficulties one way or another at work.

18. I can be ‘‘on my own’’ so to speak at work if I have to.

19. I usually take stressful things at work in stride.

20. I can get through difficult times at work because I have experienced difficulty before.

21. I feel I can handle many things at a time at this job.

22. When things are uncertain for me at work, I usually expect the best.

23. If something can go wrong for me work-wise, it will.

24. I always look on the bright side of things regarding my job.

25. I am optimistic about what will happen to me in the future as it pertains to work.

26. In this job, things never work out the way I want them to.

27. I approach this job as if ‘‘every cloud has a silver lining.’’

Please take the time to fill in the following demographic information and please check theappropriate box where necessary. This information is also very important to the research question.

1. Age: _________

2. Gender: Male ____ Female ____

3. Highest educational degree attained: Bachelor’s ____ Master’s ____ Doctorate ____

4. Professional certifications acquired, e.g., CPA, CFA (please list):

________________________________

5. Number of classes taken at institutions of higher learning which pertain directly to your

job: _____________

6. Weeks of formal training acquired on the job: ___________

7. Industry in which you work: _____________

8. Current position in the firm: _____________

9. Time (years and months) in your current position: __________

10. Time (years and months) in a similar position with any firm in the same industry:

________

11. How long have you been involved in the budgeting process at your firm? ______

12. For the most recently completed period of evaluation, please indicate your overall

performance rating.

Response anchors: 1¼ exceeds standards, 2¼meets standards, 3¼ below standards,4 ¼ standards not met.

This is the end of the research questionnaire. Thank you for participating in this survey.Your responses are sincerely appreciated!

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