How do managers react to a Peer’s situation? The influence of environmental similarity on budgetary reporting

We investigate the impact the degree of similarity between one’s decision environment and that of a referent peer has on budgetary reporting. Self-categorization theory suggests that greater environmental similarity leads individuals to adjust their behavior to adhere to the social norms of peers within the same environment. We look at a reporting environment where managers can observe environmental similarity but cannot observe peers’ behavior (e.g., managers do not communicate their budget reports between departments). In this setting, we find that managers facing a similar decision environment to that of a peer manager report higher budgets than managers facing a dissimilar decision environment. Further, consistent with the idea that managers base their perceptions about the group’s social norms on their own desired behavior when peer behavior is unobservable, we find evidence that managers predict peers to report as they would, given similar environmental circumstances. Our findings provide a valuable insight into how peer environments, without knowledge of peer actions, can subtly affect managerial behavior.