Electronic copy available at: http://ssrn.

com/abstract=1476788
Leadership and Control System Design
*


Margaret A. Abernethy
a
, Jan Bouwens
b
, Laurence van Lent
b


a
Faculty of Economics & Commerce, The University of Melbourne, Australia
b
Department of Accounting, Tilburg University, the Netherlands



Abstract
Little attention has been given to the role of leadership characteristics in the organization design
literature despite significant evidence of its importance in explaining firm behavior. This study
develops and tests a model to assess the effects of leadership style on three control choices that
are considered integral elements of a firms management control system; namely the delegation
choice, the use of planning and control systems and the performance measurement system. Our
results, based on data collected from 128 profit center managers, indicate that leadership style is
a significant predictor of senior managements use of the planning and control system and their
use of performance measurement system for rewarding lower level managers. After controlling
for operating contextual factors (namely, subunit interdependencies and knowledge
asymmetries) we find no effect of leadership style on delegation choices but do find that
leadership style influences the use of planning and control systems as predicted.

JEL classification: M41

Keywords: leadership style, empowerment, communication, execution, control system use,
organization design

September 2009
1



*
Margaret Abernethy acknowledges the financial support from the University of Melbourne. We would like to
thank workshop participants at the 2006 MAS Section Midyear Meeting, the University of Melbourne, Tilburg
University, Vrije Universiteit Amsterdam and Nyenrode University as well as Michael Bromwich, Eddy
Cardinaels, Chris Ittner, Murray Lindsay, Mina Pizzini, Steve Salterio, Frank Selto, and two anonymous referees
for helpful comments.
Electronic copy available at: http://ssrn.com/abstract=1476788
Leadership and Control System Design

INTRODUCTION
The role of leadership and its impact on the organizational design of firms virtually
disappeared from the accounting literature 20 years ago. Management scholars continue to
explore the influence of leadership on firm performance and, more recently, are concerned
with when and under what circumstances leadership might matter more or less (OReilly,
Caldwell, and Chatman, 2005; p. 5; Bass 1990; Cannella and Monroe 1997; Wasserman,
Nohria and Anand 2001). Economists are beginning to recognize the importance of the
leadership role in the firm.
1
Part of their interest stems from the desire to explain the
considerable amount of heterogeneity observed in corporate governance and accounting
practices (Rotemberg and Saloner 2000; Malmendier and Tate 2002; Bertrand and Schoar
2003). Practice, of course, has never abandoned the view that it is the attributes of a leader
that are key to understanding what goes on in organizations. Bolton, Brunnermeier and
Veldkamp (2008) draw on practice
2
to develop a conceptual framework of leadership and
include five elements of leadership: (1) setting a vision; (2) communication (3)
empowering others (4) execution and (5) integrity.
While acknowledging the importance of these key elements practitioners as well as
management scholars recognize that individuals approach the task of leadership
differently, that is, they adopt different ways of setting the vision and communicating it to
employees; different approaches to communication; variance in the extent to which
employees are empowered and differences in the way in which the vision is implemented
through monitoring and control choices. The management literature argues that these
differences are explained by the personality and behavioral traits of managers which is

1
See Bolton et al. (2008) for a recent review of formal models of leadership in economics.
2
In particular they refer to the writings and commentary of Richard Parsons, former CEO of Time Warner and
recently appointed Chairman of Citigroup.
2
conveniently summarized as leadership style, i.e. the style used to influence others to
understand and agree about what needs to be done and how to do it, and the process of
facilitating individual and collective efforts to accomplish shared objectives (Yukl 2005,
p. 8). While the management research, and more recently the economics literature,
recognize that leadership influences organizational functioning accounting researchers
have so far been relatively silent on how the leadership style influences the design and use
of management control systems. It is clearly likely to be an important correlated (but often
omitted) variable given that control choices are the means by which top managers
communicate, empower and execute their vision. We address this oversight in the
accounting literature and develop a model to evaluate the effect of leadership style on
control choices. We draw on themes in Bolton et al.s (2008) conceptual framework to
focus on three control choices that correlate with the key elements of leadership
communicating, empowering and executing the vision. We assess how the planning and
control system (PCS) is used by leaders for communicating to agents within the firm; the
extent to which a leader delegates specific managerial decisions (e.g., decisions relating to
human resources; marketing, internal process, etc.) as a means of empowering
subordinates; and the use of the performance measurement system (PMS) as a means of
executing and ensuring accountability for the goals of the firm. We expect that the choice
in the use and design of these controls will be influenced by the leadership style of senior
management.
Our model enables us to explore how leadership style influences the way in which a
leader communicates, empowers and executes the vision of the firm. The results, based on
a broad-based sample of profit center managers, indicate that control choices are
determined by leadership characteristics. After controlling for contextual operating
factors, i.e., interdependencies among profit centers, and knowledge asymmetry between
3
the profit center manager and his superior, we find that leadership style significantly
influences top managements use of planning and control systems as a communication
device within the firm and their reliance on quantitative performance measures for
compensating and rewarding profit center managers. Contrary to our expectations we do
not find that leadership characteristics influence the decision to delegate managerial
responsibilities to subordinates within the firm. This decision is only influenced by the
operating context. Consistent with prior literature, we find that increasing levels of
knowledge asymmetry lead to greater delegation and as interdependencies among profit
centers increase top management will retain decision rights.
The following section provides the theoretical justification of the model.

HYPOTHESES DEVELOPMENT
Effect of Leadership Style on Control Choices
The authority that resides with top management enables them to define structures,
shape strategic priorities, implement formal controls, set targets, and then take action to
correct deviations. However, the authority to direct and control subordinates is only part
of the story. It is also the behavioral tendencies and personal traits associated with a leader
that influence how they use controls to influence the behavior of subordinates (Bass 1990;
Hunt and Conger 1999; Waldman and Yammarino 1999; Waldman, Ramirez, House and
Puranam 2001; Yukl 2005). It is the ability of leaders to articulate and communicate their
vision for the firm as represented by their own values, their role modeling of those values,
their ability to communicate performance expectations and provide subordinates with the
confidence to achieve those expectations (Roberts 2004). In other words, it is the personal
relation between the leader and his/her followers that results in changes in firm behavior.
4
Much of the management literature defines leadership in typologies that include at
least two categories of leadership style. We select the Stogdill and Coons (1957) typology
for three reasons. First, we want a construct that clearly distinguishes the interpersonal
characteristics of a leader from control choice decisions that a leader makes. The Stogdill
and Coons typology captures a leaders general preferences in relation to their relationship
with subordinates without any reference to how those interpersonal traits are translated
into specific behaviors associated with control system use. This is in distinct contrast to
the strand of research in the management literature that considers delegation, information
exchange and communication as an expression of a particular leadership style (Bass and
Valenzi 1974; Shapira 1976; Kerr and Jermier 1978; Graen 1989) rather than viewing
leadership style as a distinct construct. The use of the Stogdill and Coons (1957) typology
enables us to clearly distinguish leadership style from decisions relating to delegation and
the way in which the planning and control system and the performance measurement
system are used within the firm. Second, we choose the Stogdill and Coons (1957)
typology given recent support for its construct validity (Judge, Piccolo and Ilies 2004).
Third, the instrument has been used repeatedly in the accounting literature (Brownell
1985; Otley and Pierce 1995; Moores and Yuen 2001). Luft and Shields (2003) stress the
importance for empirical research in accounting to operationalize constructs using similar
instruments to more readily allow for comparative analysis. The Stogdill and Coons
(1957) typology classifies leadership style into consideration and initiating structure.
Consideration is the degree to which a leader involves others in decision-making,
considers the opinions of subordinates, and shows concern for their well being. Initiating
structure is the degree to which top management structures the work environment by
implementing uniform procedures and by defining roles and responsibilities.
3


3
The Stogdill and Coons typology is conceptually similar to Waldman et al.s transactional/charismatic leadership
5
It is clear from both the theoretical and empirical literature that top management can
exhibit characteristics of a consideration and an initiating structure style. They can, on the
one hand, have a high initiating structure that leads them to structure their own role and
that of their subordinates through the use of procedures and other formal control
mechanisms that provide direction and monitor the performance of subordinates. They
can, at the same time, have interpersonal leadership traits that lead them to develop more
personal relationships with subordinates and allows them to informally communicate their
preferences, seek input from subordinates and develop a collegial and trusting relationship
with subordinates (Waldman et al. 2001; Koene, Vogelaar and Soeters 2002). We expect
to observe that managers can be both considerate and provide structure or lack either one
of these traits. We hypothesize that the two traits will have quite distinct effects on control
choices.
Empowerment of Subordinates the decision to delegate decision rights
Empowerment of others is an important choice made by senior management. The degree
to which top management delegate decision rights to subordinates is an explicit choice.
Delegation is quite distinct from leadership style as it represents the real authority given
to subordinates to make decisions over a range of decisions that affect the functioning of
the business (e.g. HR, process, marketing, strategic). The degree of delegation varies from
very little, where senior management make all of the major decisions to full delegation
where subordinate managers are given the full set of decision rights (i.e. does not need to
seek approval from a superior) such as sometimes associated with investment or profit
centers (Bouwens and van Lent 2007). We know from prior research that the operating
context of the firm influences the delegation decision. Empirical evidence indicates that
interdependencies among subunits within the firm influence the choice to delegate

style. Transactional leadership maps neatly into the initiating structure style while charismatic and consideration
style both capture the interpersonal relation between superiors and subordinates.
6
decision rights (Bushman, Indjejikian and Smith 1995; Keating 1997; Abernethy,
Bouwens and van Lent 2004) as does the knowledge asymmetry between senior managers
and subordinates (Gordon and Narayanan 1984; Baiman, Larcker and Rajan 1995; Nagar
2002; Christie, Joye and Watts 2003; Abernethy et al. 2004).
What we dont know is whether leadership style will influence this choice or whether it
is entirely determined by the operating context. There is some support that leadership
style will partly explain the extent of delegation. The findings from the Ashour and
England (1972) study suggest that the degree of delegation (operationalized as
discretionary and non-discretionary decisions) differs dependent on whether leaders are
high in dominance or low in dominance. Similarly, Leana (1986) argues that managers
who view their roles primarily as providing direction to subordinates (high in dominance)
will delegate less than managers who view developing subordinates (low in dominance) as
important to their role. These two different perceptions of leadership roles are very similar
to the initiating structure role and the consideration role.
Leadership style captures cognitive or personality characteristics of managers. Based on
prior literature we expect these characteristics will manifest themselves in the leaders
preference for empowerment of subordinates. Leaders high on initiating structure are
much more structured in their approach to leadership. They prefer to define roles
unambiguously, define specific tasks and rely on the use of standardized rules and
procedures to direct the behavior of subordinates and monitor adherence to standards. If
this is top managements preferred leadership style it is likely that the choice to delegate
decision rights will reflect this preference. Empowerment for this type of leader will be
through delegation for specific tasks or a pre-specified set of targets but decision rights
will be bounded within those targets subordinates will not have the autonomy to make
decisions without referring to the superior.
7
This is in contrast to a consideration leadership style. This style is characterized by a
leader not only concerned with the welfare of subordinates but one who desires to have
subordinates involved in the decision making of the firm. Involvement in decision
making cannot occur effectively unless subordinates perceive they have real authority
and autonomy to make decisions over their own areas of responsibility. In other words,
subordinates are empowered to make decisions at the local level and are not bounded
tightly by structured roles and responsibilities. What is important in considering the
relationship between leadership style and empowerment is that the delegation decision and
leadership style be internally consistent or cognitive dissonance will emerge.
4
To
minimize cognitive dissonance we would expect to observe leaders high on initiating
structure preferring low levels of decision rights delegation and those high on the
consideration dimension preferring high levels of subordinate autonomy.
While the relationship between leadership style and the delegation choice is
intuitively appealing, it is not clear whether the cognitive dissonance created by a
mismatch between leadership style and delegation choices will add additional variance to
the delegation choice given the significance of the operating context on this choice. Prior
literature provides convincing evidence that operating context is the primary determinant
of delegation (Nagar 2002; Christie et al. 2003; Abernethy et al. 2004). If this is the case it
is possible to observe no relation between leadership style and delegation choice. We test
this two-horse race by controlling for the operating context in the model. Given the
uncertainty a priori as to the importance of leadership style vis--vis operating context we
state our hypothesis in the null.
H1: There is no relation between leadership style and level of delegation of
decision rights to subordinate managers.

4
Research in the late 1970s and early 1980s studied the relation between formalization and centralization (Grinyer
and Yasai-Ardekani 1980). This study is concerned with the cognitive characteristics of a leader as displayed by
their leadership style and how these characteristics manifest themselves in delegation choice; not the relation
between formalization and delegation choice per se.
8

Communicating Interactive Use of Planning & Control Systems (PCS)
The way in which leaders communicate is an integral part of their leadership style
(Bolton et al. 2008). Leaders must be able to communicate their vision as well as
articulate the way in which that vision is translated into operational goals and objectives.
Planning and control systems (PCSs) are used in most large firms (Merchant and Van der
Stede 2007) to communicate a firms goals and objectives through the firm. Scherr and
Jensen (2006) provide a model of leadership that makes explicit the importance of
implementing control systems to achieving the vision of top management -- great
leadership requires effective systems that create and publicize breakdowns. These
systems not only communicate what is important but also identify breakdowns or
variances that can then be resolved in order to achieve the vision. Prior research in
accounting tends to focus on the relative importance of PCSs rather than difference in the
use of the systems by senior management within firms. This study examines how PCSs
are used by senior management to communicate what is important for the firm drawing on
descriptions of PCS use provided by Burchell et al. (1980) and later Simons (1990). While
both studies were studying PCSs from different theoretical perspectives there are
similarities in the way they described managers use of PCSs.
5
For simplicity, we can
think of PCS being used for communication along a continuum where at one end PCS are
used in a relatively didactic format where targets are specified and performance is
measured against these targets. At the other end, PCSs are used as a mechanism to
facilitate greater informal and interpersonal communication between top management and
lower level managers and/or among the lower level managers. The former use would be a

5
Burchell et al. (1980) were interested in a normative model of accounting use to explain differences in what
theoretically would be expected based on the operating context and what was actually observed. Simons (1990;
1991) wanted to explain why the use of a particular element of a firms control system would differ depending on
the strategic uncertainties faced by the firm. Our study focuses more broadly on the use of PCS for communication
and what determines that use.
9
relatively standardized formal processwhat Burchell et al. (1980) would refer to as an
answer machine and what Simons (1990) describes as diagnostic use. The latter would
be a more interactive process that facilitates ongoing communication between top
management and lower level managers. Simons refers to this as interactive use and
Burchell et al. (1980) classifies this as a dialogue or idea creation machine.
We are interested in the interactive communicative use of PCS. The use of PCS for
interactive communication encourages lower managers to be involved in the setting of
targets and to provide input into the budget. It allows top management to reveal their
priorities on particular targets, and it facilitates debate among the levels of management on
how best to achieve targets. If the system has been designed as an interactive
communication tool, it is likely that it will be used for this purpose both vertically within
the firm (i.e. between top management and profit centre managers); horizontally within the
firm (between profit centre managers) and also within the individual budget units. We
expect that the degree to which the PCS is used for interactive communication will be
influenced by leadership style. While we expect that the direction of the relation between
both leadership style and interactive use to be positive we expect that the relation will be
more positive for the consideration style of leadership than for the initiating structure
leadership style. The consideration leadership style captures top managements
preferences for an interpersonal style of management. A manager high on consideration is
one who will positively seek to communicate and interact with subordinates. When used
as an interactive communication tool, the PCS provides the means for leaders to
communicate their visions and expectations and to seek input from subordinates (Simons
1991; Abernethy and Brownell 1999). They will use the PCS to communicate informally
their strategic priorities and expectations as to what subordinates should achieve and how
best to achieve those priorities. If the system encourages vertical communication it will
10
also encourage horizontal communication among peers as they seek to use the system for
debating alternative means of achieving strategic priorities.
Brownell (1981), drawing on cognitive behavioral theory, argues for congruence
between personality variables and the conditions of control inherent in a particular
situation. In this study, we expect congruence to be high between the personal traits
associated with a consideration leadership style and communicative use of PCSs, that is,
we expect a significant and positive relation. We do not expect to observe a negative
relation between initiating structure and interactive use of PCS. Given Scherr and Jensens
(2006) argument that strong leadership will always be accompanied with systems that
direct and monitor achievement of objectives, we expect that initiating structure will also
be positively related to interactive use but in a more limited way. A manager with
initiating structure leadership traits would use the PCS to communicate but it would likely
be much more hierarchical and a more structured form of communication. Input from
subordinates would be more formal, standardized and routine. For example, subordinates
might be given the opportunity to provide information concerning variances through a
formal reporting process. Overall we do not expect that interactive communicative use of
the PCS would be as intensive as what we expect to observe with managers high on the
consideration leadership traits. Our expectations can be summarized as follows:
H2a: The relation between leadership styles and use of the planning and control
system as an interactive communication device will be positive.
H2b: The relation between consideration style of leadership and planning and
control systems will be more positive than the relation with initiating
structure style of leadership.


Executing the vision -- Use of Performance Measurement System (PMS) for
accountability

The third dimension of leadership is the way in which senior management execute
the vision. There are numerous ways in which leaders can execute their vision and achieve
11
accountability. Performance measurement systems (PMS) are one form of accountability
used by top management to monitor behavior and to evaluate performance. These systems
specify desired behavior in the form of targets and then measure performance against these
targets. Performance measurement systems influence behavior because they form the
basis for compensation and promotion decisions within the firm. The extent to which this
type of accountability mechanism is used will depend on the leadership style exhibited by
top management. However, we only expect this relationship to hold for the initiating
structure dimension of leadership. Top management, high on the initiating structure
dimension, have a preference for formal structures and processes (Waldman et al. 2001).
The use of performance measures for compensation and promotion of lower level
managers requires a reliance on the formal setting of performance targets, measurement of
performance against these targets and a compensation system that computes bonuses based
on these formally determined performance targets. Controlling subunit managerial
behavior based on this form of control is consistent with an initiating structure leadership
style (Brownell 1985). We thus expect to observe a positive relation between initiating
structure and the use of the PMS. As the consideration style is associated with strong
informal interpersonal relations between superiors and subordinates we do not expect that
this leadership dimension will influence the use of PMS. Our expectations can be
summarized as follows:
H3a: There is a positive relation between initiating structure leadership style and
use of the performance measurement system.
H3b: There is no relation between consideration leadership style and use of the
performance measurement system.

Relations among control choices
Several recent papers empirically examine whether control choices are made
simultaneously (Nagar 2002; Abernethy et al. 2004). These empirical studies, based on
the economics design literature, support other evidence gathered in the field that
12
delegation choices are made first followed by other management accounting choices
(Abernethy and Lillis 1995). We thus follow prior empirical findings and predict that
delegation choices will be an important determinant of the interactive use of PCS and the
use of performance measures for determining compensation and/or promotion. Our
arguments for these expectations are as follows.
6

Much of the literature on control system choices makes a simplifying assumption
that delegation of decision rights is necessary where there is information asymmetry
between superiors and subordinates. To improve decision-making, top management have
to delegate to lower-level managers who have private information. This view usually
derives from basic agency models in which the firm responds to the moral hazard problem
created by the delegation of decision making power to more knowledgeable agents by
implementing performance measurement and reward systems which links agents actions
to the outcome of their decisions. Delegation then is a substitute for top management
trying to acquire information and for involving subordinates in decision-making.
In contrast, we consider PCSs to provide a complement to the delegation choice as
they have the potential to address some of the information asymmetry that exists between
superiors and subordinates. Even when decision-making is delegated, top management is
likely to have private information they need to pass on to lower-level managers. Interactive
use provides a means to communicate a common mental model of the business or helps to
establish common values which will guide subordinates in making congruent decisions.
The use of the PCS as an interactive communication device allows top management to
reveal their preferences to subordinates, encourage sharing of information between top
management and lower level managers and allow managers to debate the underlying

6
We undertook additional analysis (not reported here) to ensure that this was not an unreasonable expectation.
Specifically, we estimated a non-recursive model in which the interactive communication use of PCS and PMS
were allowed to feed back to decentralization. Identification of the model required that we made some restrictions
about which relations were admitted. The results are consistent with the idea that management accounting control
choices follow decentralization choices.
13
assumptions associated with targets and objectives that underlie the PCS (Simons 1990;
Simons 1991; Abernethy and Brownell 1999; Garicano 2000). Davila (2000) and Bisbe
and Otley (2004) argue that PCS can be used effectively to fill an information gap and
provide some evidence of the circumstances in which this will occur. We argue that this is
likely to occur when decision rights are delegated. In other words, the PCS are used as a
complement rather than a substitute of the delegation choice.
If lower level managers have little autonomy in the operation of their unit there is
less benefit in interacting with top management. The information gap is less and thus top
management will not need to expend resources communicating strategic priorities using
the PCS for interactive communication. If the authority for decision making resides with
the top management, it will be more efficient for top management to use hierarchical
systems to direct behavior of subordinates. It is expected that a more formal or diagnostic
use of the PCS will occur when few decision rights are delegated. Our expectation
concerning delegation and the communicative use of PCSs can be summarized as follows:
H4: There is a positive relation between the level of delegation and interactive
communication use of PCSs

Based on prior empirical evidence we also expect delegation choice to be positively
associated with the use of PMS for measuring and rewarding performance (Nagar 2002;
Abernethy et al. 2004). As argued above, delegation of decision rights creates the potential
for moral hazard problems to emerge. One way for top management to respond is by
implementing PMS to encourage goal congruence. This system forms part of the formal
incentive-based contracting process with subordinates. Desired performance is specified
in quantitative targets (often in the form of accounting metrics); performance is evaluated
based on these targets and rewarded in the form of compensation and/or promotion. In
contrast, when decision-making is centralized fewer control loss problems occur, as
14
decision rights have not been delegated. Top management is less likely to rely on
performance measurement linked to rewards but rely instead on less costly monitoring
devices to control the behavior or actions of subordinates (e.g. supervision, procedures,
rules). While this study does not examine these alternative monitoring devices prior
research indicates that supervision and standard operating procedures are less effective in
decentralized settings simply because top management lacks the required knowledge about
what needs to be done to pre-specify actions or regulate behavior through rules and
procedures (Bruns and Waterhouse 1975; Merchant 1985; Abernethy and Brownell 1997).
Our expectation is summarized as follows:
H5: There is a positive relation between level of delegation and use of performance
measurement system.


Control Variables
We control for two operating contextual factors, namely subunit interdependencies and
knowledge asymmetry, in the model used to test our hypotheses.
Summary of Hypotheses
Table 1 summarizes the hypotheses to be tested.
RESEARCH METHOD
Sample selection
We require a sample that enables us to assess the leadership style of top management and
the control choices made by those managers. We collect questionnaire data from profit center
managers from a cross section of firms in the service and manufacturing sectors of the
Netherlands. These managers report to the CEO of the firm and are considered to be the most
appropriate respondent to reflect on leadership style and control system choice of top
management. The managers are selected as follows. We first identify a sample of service and
manufacturing firms that reflect the regional distribution of firms throughout the Netherlands
15
and is consistent with the ratio of service and manufacturing firms in the Netherlands. These
firms were then contacted and asked to participate. Each firm is visited to ensure that they are
of the required size and have a profit center structure. We only include firms that have at least
three profit centers of a reasonable size (i.e. greater than 100 employees). We require firms to
be sufficiently large to warrant the implementation of formal management control systems. It is
important that the systems in place can be used for performance measurement and for planning
and control. We interview one randomly selected profit center manager in each firm. In
addition to visiting each of the firms we offer to provide a performance measurement seminar to
all respondents. This method of obtaining participation results in an excellent response rate. Of
the 170 firms contacted, more than 75 percent agree to participate. This results in a sample of
128 profit centers.
Our respondents have on average 5.15 years of experience (median = 3.00) in their profit
center and are on average 42 years of age (median = 42). They held their current position for an
average of 3.2 years (median = 2.00). The mean experience of the profit center manager is 1.0
year shorter than that of top management (median = 0); the difference in experience between
respondent and his superior in the industry is on average -0.26 years (median = -1.0). The mean
profit center employs 208 people (in full time equivalents) (median = 93.5). These descriptive
statistics are consistent with respondents occupying the hierarchical position we intended to
address managers with profit center responsibility reporting to the CEO of the firm. A
breakdown of the sample by industry and size is provided in Appendix 1.
Variable measurement
We use five main constructs in our empirical model as well as two context control
variables. We measure each of these constructs using seven-point Likert-type scales. We assess
the composite reliability of each of the constructs with the composite reliability index proposed
by Fornell and Larcker (1981). This index is analogous to Cronbachs alpha and reflects the
16
internal consistency of the indicators measuring a given construct. We also compute estimates of
the variance extracted (again following Fornell and Larcker 1981). This statistic measures the
amount of variance that is captured by an underlying factor in relation to the amount of variance
due to measurement error. Estimates of 0.50 or larger are desirable, albeit that lower values are
acceptable in fields of inquiry that are still not well understood. We use this statistic to assess
discriminant validity of our constructs. For any two constructs, the square root of the variance
extracted should be greater than the simple correlation between these constructs.
Where possible we use alternative measures to assess the convergent validity of our
variables. Convergent validity exists if the correlation between construct and alternative
measure is positive and significant. Composite reliabilities of our constructs are good; the index
varies between 0.79 (leadership style of initiating structure) and 0.913 (interdependencies). The
average variance extracted is generally above 0.50 although three constructs are somewhat
below which indicates that these are subject to some measurement error. This analysis supports
the use of a latent variable estimation method (see below) which mitigates the inconsistency in
parameter estimates from individual variables with measurement error (consistent with the
recommendation in Ittner and Larcker (2001)). Notwithstanding the measurement error in some
of the constructs, discriminant validity is established in all cases.
7
We discuss the measurement
of all variables below. Table 2 provides reliability statistics and the simple correlations between
the constructs. Survey items are reproduced in Appendix 2.
8

Insert Table 2

7
The questionnaire items of the leadership style and use of control systems instruments (discussed below)
have similar phrases in some occasion. For example, we measure leadership with lets managers know what is
expected of them whereas the use of PMS instrument includes the question to what extent does your superior use
performance measures. Note, however, that the leadership questions ask about personality traits of the leader
without referring to the leaders use of control systems. Our control system questions, on the other hand, ask
explicitly how control systems are used in the relation between leader and subordinate without referring to the
personality of the leader. Thus, the constructs are clearly distinct in their measurement. This is also borne out by the
statistical evidence based on both formal discriminant validity tests based on AVE in Table 2 and a clean factor
loading in Table 3.
8
The appendix also reports Cronbachs alpha statistics for each of the latent constructs, which we provide for
illustrative purposes only. Our evaluation of the psychometric properties of our constructs is based on the Partial
Least Squares measurement model as discussed below.
17
Delegation choice
The extent to which top management delegate decision rights is viewed as a design
control choice. We use an instrument that captures, in a relatively objective manner, whether
decision authority resides with the superior or the subordinate. We use the instrument developed
by Abernethy et al. (2004) and ask respondents to indicate their decision making authority
relative to their superior on five dimensions: strategy, investments, marketing, internal processes
and human resources. This is consistent with the approach used by others (Khandwalla 1977;
Gordon and Narayanan 1984; Nagar 2002; Bouwens and van Lent 2007). The lower end of the
scale is anchored by my profit center has all authority while the upper end of the scale is
anchored by my superior has all authority. After evaluating the measurement properties of this
instrument we dropped one item (on investments).
9
Each item is reverse coded such that larger
values of the construct represent higher levels of delegation.
Interactive communication use of PCS
We use the instrument developed by Abernethy and Brownell (1999) and adopted by
others (Bisbe and Otley 2004) to measure the use of the PCS. Abernethy and Brownell (1999)
developed the instrument to capture Simons (1990)
10
notion of interactive use. While Simons
study was not explicitly about the use of PCS for communication within the firm, it is implicit
from his descriptions of interactive and diagnostic use. The items in the Abernethy and
Brownell (1999) instrument relate to the way in which the PCS is used for communication
within the firm and thus appropriate for assessing the extent to which PCS are used as an
interactive communication device. The original instrument consisted of four items and was used
in the context of hospitals. We rephrase the original items to better fit our broad-based sample.

9
The delegation instrument was used in prior literature at the divisional level. In contrast, our sample includes
profit center managers which do not typically have decision making power over investments (see, Anthony and
Govindarajan 2004).
10
Note that Simons (1990) research examined the way different elements of a firms control system was different
dependent on the level of strategic uncertainty. In some circumstances the budget could be used interactively and
in other circumstances it could be used diagnostically. Underpinning Simons construct is the notion of
communication as he was interested in how the system allowed senior management to reveal their preferences and
to encourage debate among subordinates.
18
We ask respondents their view on the way in which the PCS is used within their firm. The
instrument includes questions that relate to use that involves the CEO and the profit center
manager as well as its use among managers within the firm. We follow Abernethy and
Brownells example to validate the instrument by asking respondents earlier in the
questionnaire to choose which of two descriptions of the use of planning and control systems
best fits the way in which the system is used. These two descriptions, again following Abernethy
and Brownell, are based directly on Simons (1991; 1995). One description represents
interactive communication use, the other a more formal diagnostic style. This method of
construct validation (i.e. using two forms of measurement) is supported in the literature. The
correlation between the forced choice of two alternative descriptions of planning and control
system use and our construct of interactive communication use of PCS is 0.35 (p<0.001), which
provides further assurance as to the validity of our construct. We recoded the answers in such
fashion that higher scores represent a higher interactive use of the PCS.
Performance Measurement System (PMS)
We use a purpose-developed instrument to capture this construct. We are interested in
top managements use of performance measures in determining compensation and/or promoting
profit center managers. Prior literature either measures the relative importance of performance
measures in evaluating managerial performance (e.g., Lambert and Larcker 1987) or the weights
placed on different types of performance measures in compensation incentive contracts (Ittner,
Larcker and Rajan 1997). These instruments focus on the design of the compensation system
rather than whether it is used for evaluating and rewarding managerial performance. We use a
three-item measure to capture the extent to which top management use performance measures in
determining the compensation and/or promotion prospects of profit center managers. The
instrument is pilot tested prior to its use. The instrument requires respondents to indicate on a
seven-point Likert scale, anchored at the poles by not at all and to a large extent, the degree
19
to which their superior makes compensation/promotion decisions (1) conditional on achieving
predetermined targets, (2) based on performance measures that are taken at face value, and (3)
based on accounting numbers. The second item is dropped, however, after evaluating the
measurement properties of the instrument. The item does not load together with the other two
items in the cross-loading matrix and the measurement model indicates that it should be
removed. In hindsight it is obvious that the second item is capturing a different construct to the
one of interest in this study. Answers are coded such that high scores represent an intensive use
of performance measures in determining compensation/promotion decisions.
Leadership style
We use an adapted version of the leadership style instrument (LBDQ) developed by
Stogdill and Coons (1957) (see also, Halpin (1957)). This instrument is used repeatedly in the
literature to capture two dimensions of leadership style: (1) consideration and (2) initiating
structure. The continued validity of the LBDQ instrument has recently been demonstrated
(Judge et al. 2004). Some of the items in the original instrument are eliminated due to poor
reliability or validity scores. A two-factor structure emerged after removal of these items. The
items in these two factors capture the essence of the initiating structure and consideration style
constructs of leadership and are generally consistent with the items used in earlier studies.
11

The items are coded such that high values represent a strong presence of the leadership style
with which they are associated.

Operating context variables
We measure knowledge asymmetry based on the instrument developed originally by
Dunk (1993) and the tests of its convergent validity are good.
12
We use Keatings (1997) two-

11
However, two items that belong to the initiating structure scale loaded in contrast on the consideration factor
(Tries out his/her new ideas in the group and Makes his/her attitudes clear to the group). We follow the outcome of
the factor analysis and use these questions as indicators for consideration style. Our results, however, do not change
significantly if we remove these indicators from the analysis.
12
The method and results associated with the convergent validity tests for subunit interdependencies and
knowledge asymmetry are available from the authors.
20
item instrument to measure interdependencies. In this instrument one question asks respondents
to identify the extent to which their activities impact on other profit centers activities and the
other question asks the extent to which their performance is affected by the activities carried out
by other profit centers. The convergent validity of this construct is more than satisfactory.
Model estimation
We estimate our path model using partial least squares (PLS). In PLS the measurement
model (relating the latent constructs and their observed indicators) and the structural model
(which specifies the relations between latent constructs) are estimated together. To achieve this,
the measurement and structural parameters of the path model are estimated in an iterative
fashion using simple and multiple ordinary least squares regressions (Barclay, Higgins and
Thompson 1995). PLS avoids assumptions that observations follow a specific distribution (e.g.
multivariate normal) and that they are independently distributed. As such, PLS is particularly
useful as an estimation method for small samples and where specific distributional requirements
are less appropriate (Chin and Newsted 1999). Because the variables are standardized, the
structural equation parameters are standardized regression coefficients and the measurement
model parameters are correlations between the latent variable and its observed indicators.
13
We
provide measurement model details in Table 3. Bootstrapping is used to evaluate the statistical
significance of the path coefficients. Specifically, we generate 1000 random samples of 128
observations (with replacement) and use the resulting empirical distribution of the parameter
estimates to compute bootstrap t-statistics and standard errors.
One of the challenges in testing a model of control system choices is the endogeneity
problem (Ittner and Larcker 2001; Luft and Shields 2003; Larcker and Rusticus 2004). As with
most empirical research examining control choices, most constructs in this study are inter-

13
To provide further assurance with regard to the psychometric properties of our constructs, we also conduct an
explanatory factor analysis in which we include all indicators for all constructs. We obtain a clean structure for
the factor loadings that corresponds with the way the indicators are assigned to the latent variables in the PLS
estimation.
21
related and, at some level in the firm, all constructs are choice variables. Nevertheless, the
design of our study enables us to abstract from some of the detrimental effects of endogeneity.
We use a causal model that includes two separate stages. The first relates to the delegation
choice made in response to the two operating constraints and leadership style. These constraints
are assumed to be exogenous they are the circumstances that face the firm as a result of market
conditions and/or technology. We argue that top management respond to these constraints
combined with the personality traits associated with leadership styles through their decisions to
delegate decision making to lower-level managers (in our study profit center managers). Once
this delegation choice has been made, the second stage relates to the top management choices
that make this organizational design work (Abernethy and Lillis 1995; Abernethy et al. 2004;
Roberts 2004). According to Roberts (2004) structural design choices are more slow moving
and can be considered as relatively fixed once implemented (Van Lent 2007). In contrast, the
use of the control system is much more malleable and subject to managerial discretion by
managers. In sum, both structural decisions and operating constraints can reasonably be
considered pre-determined and a fully recursive model can be estimated. As reported in footnote
5, we conducted some additional analysis to confirm that our reasoning is consistent with the
data.
Insert Table 3 here
RESULTS
Correlation results
Table 2 reports on the Pearson correlations between the constructs in this study. We are
interested in the correlations between the leadership style constructs and the three control
choices as well as the inter-relations among the control choices. The leadership styles of
initiating structure and consideration are both strongly, positively associated with the interactive
communication use of PCSs (r=0.31, p<0.01 and r=0.40, p<0.01 respectively). We also find that
22
initiating structure is positively associated with the use of PMS (r=0.42, p<0.01), whereas a
considerate style does not impact on the use of PMS. We do not find any evidence that
leadership style affects the delegation choice. Delegation, however, is positively associated with
the interactive communication use of PCS (r=0.18, p<0.05) but there is no relation with PMS
(r=-0.07, p>0.10).
The two contextual variables included in our model as control variables are significantly
correlated with the decision to empower subordinates through delegation of decision rights.
Knowledge asymmetries are associated with more delegated decision rights (r=0.35, p<0.01)
and positively associated with greater interactive use of the PCS for communication, albeit at the
10 per cent level (r=0.15). There is a negative relation between subunit interdependencies and
delegation (r = -0.22, p<0.05) and no relation with the two remaining control choices.
While there are some instances of significant correlations between the independent
variables, those correlations are not sufficiently large to raise concerns about multicollinearity
(Griffiths, Hill and Judge 1993).
Main findings
Our findings are presented in Table 4.
14
Our model allowed us to test whether
leadership style matters in the decision to empower subordinates through delegation of decision
rights. We know from prior literature that the operating context is a significant predictor of
delegation and our results support prior findings. Knowledge asymmetries are positively
associated with delegation choices (0.32, t=3.72) and interdependencies are negatively, but
weakly, associated with delegation choices (-0.15, t=1.57).

Once we control for operating
context, however, leadership style had no further predictive power on decision right delegation.

14
We undertake several robustness checks to determine if our results are influenced by the measurement of the two
management accounting system variables (PCSs and PMS). We test each item of the PMS instrument separately in
the model. We also exclude one of the items in the PCS instrument that does not refer to the use of PCSs in the
superior/subordinate relationship and test the model with the three item scale. In all cases the results are not
substantively different from those presented here (details of these analysis are available from the authors).
23
Neither leadership style affects a leaders preferences for empowering subordinates.
15
We also
find support for Hypothesis 2. We expected that a considerate leader would interactively use the
planning and control system as a communicative device. Indeed, the coefficient on the path from
the considerate style to the interactive communication use of PCS is significant and positive
(coefficient=0.36, t=4.77). We also find that initiating structure style is associated with the
interactive communication use of the PCS (coefficient=0.23, t=2.59) although as expected under
Hypothesis 2b the relation is less positive than the relation between PCS and consideration
leadership style. Using a t-test, we determine if these coefficients are significantly different
from each other as opposed to being significantly different from zero. We find a significant
difference (t=3.08, p<0.01). Hypothesis 3a and 3b are also supported. Leaders who score high
on the initiating structure dimension (Hypothesis 3a) use performance measures more in
promotion/compensation decisions (coefficient=0.42, t=4.36) and we find no relation between
considerate leadership style and the use of performance measures in promotion/compensation
decisions (Hypothesis 3b). We also find evidence to support Hypothesis 4, namely that the
delegation choice affects the interactive communication use of PCS. The path coefficient
between these constructs is 0.17 (t=1.69). Contrary to what we expect (Hypothesis 5), the
delegation choice does not seem to affect the use of performance measures for
promotion/compensation decisions (coefficient=0.07, t=0.68)
The explanatory power of the model is comparable to that reported in other organization
design studies (Baiman et al. 1995; Bushman et al. 1995; Keating 1997; Nagar 2002; Christie et

15
It is possible that our setting is not powerful enough to reject the null hypothesis of no association between
leadership style and delegation. We investigate this possibility by conducting two analyses. We first compute the
power of our test of H1 under the assumption that the delegation equation is a regular OLS regression (i.e., we
ignore that the variables are in fact latent constructs). Using a critical significance level () of 5% (two-tailed), we
can detect a true effect size of 0.07 with about 80% power. We consider this the upper bound of the power of the
test. Second, we conduct a proactive Monte Carlo simulation of power (following Marcoulides and Saunders
(2006)), which takes into account the psychometric properties of our latent variables. We use as hypothesized
values for the model parameters the estimated factor loadings and error variances from the PLS measurement
model. Our aim is to see, given our sample size of 128, how large the correlation between leadership style and
delegation in the population has to be in order to detect it with 80% power. The outcome of this analysis (based on
1000 replications) is that the true correlation should be at least 0.30. We consider this the lower bound on the power
of the test. Taken these analyses together, we believe that we can plausibly detect true correlations of about 0.2.
Thus, we conclude that we do not fail to reject the null because of a lack of power.
24
al. 2003; Abernethy et al. 2004). Our model explains about 15 per cent of the variance in the
delegation construct, 26 per cent in the interactive use of planning and control systems for
communication and 19 per cent in the use of performance measures for promotion/compensation
decisions construct.
CONCLUSIONS AND LIMITATIONS
The management accounting literature has paid little empirical attention to the role of
leadership style in the control choices of top management. Researchers in the organization
design literature focus attention on the effect of operating context on control choices. The
management literature, on the other hand, continues to debate how, when and why leadership
matters. The economics literature is just beginning to recognize that management matters and
are attempting to explain some of the heterogeneity observed in corporate governance and
accounting practices by including variables that capture managerial traits of top management.
This paper contributes to the literature by extending organization design models to
include leadership style while controlling for the contextual factors known to influence control
choices, namely, interdependencies and knowledge asymmetries. We extend our understanding
of management control systems by including a structural design choice and two management
accounting control choices that relate to the way in which top management use these systems.
We focus on use given the relatively sparse empirical research examining the way in which
top management use management accounting systems. Much of the prior literature has been
concerned with the design characteristics of management accounting systems, that is, the
proportion of financial versus non-financial measures in the performance measurement system;
the proportion of variable pay in the compensation system, etc. And yet as Simons (1995) and
others have argued, firms often have management accounting systems with similar technical
characteristics -- what differs is the way in which these various systems are used to achieve
particular purposes by top management.
25
Our findings underline the importance of leadership style in explaining control system
choices. Leadership style is a significant predictor of both the use of the planning and control
system and the use of performance measures for compensation and promotion. In particular, we
find that top management with a consideration leadership style will use the planning and control
system as an interactive communication device to informally reveal their preferences to
subordinates and to obtain input from subordinates. This supports the management literature
that demonstrates the importance of strong interpersonal leadership traits as a means of sharing
and communicating top managements vision and to inspire subordinates with the confidence to
meet their expectations (Waldman and Yammarino 1999). Interactive communicative use of the
PCS by top management facilitates this process. We also find that initiating structure influences
the interactive communication use of PCSs but the use of the PCS for this purpose is less
intensive than it is for those with a consideration leadership style. The differences in the
intensity of use by managers with different leadership traits could be due to the different way in
which the PCS is used. It is plausible that top management uses the PCS to structure the
planning process while the consideration leadership style is used to personally interact with
subordinates, communicate their strategic preferences and to obtain feedback from subordinates
during the process. The latter use would suggest a much more intensive use, and thus a more
positive relation, for those with a consideration leadership style. The finding that initiating
structure is associated with top managements use of performance measurement system for
compensation and promotion is consistent with expectations. Managers strong on this
leadership dimension will express themselves in their use of formal systems that specific targets
and then take actions based on results.
We find no relation between leadership style and delegation of decision rights to
subordinates. Our results support prior empirical research demonstrating the importance of the
operating environment in explaining the delegation choice. Both subunit interdependencies and
26
knowledge asymmetry affects the choice to delegate decision to subordinate managers. The
absence of any relation between leadership style and delegation decisions also questions the
assumption in the management literature that delegation is an expression of a particular
leadership style (Bass and Valenzi 1974; Shapira 1976; Kerr and Jermier 1978; Graen 1989).
The operating context appears to have no effect on the use of either the PCS or the use of
performance measures for compensation and promotion. What the findings do indicate is that it
is the delegation choice that explains use. We find a significant and positive relation between
delegation and the interactive communication use of PCSs. It is possible that the potential moral
hazard problem created through delegation of decision rights is partly overcome by increasing
the dialogue between superiors and subordinates in the planning and control process. This
interaction increases information flows upwards and allows top management to reinforce what is
important to achieving the firms goals. In this way superiors attempt to influence the decision
choices made by subordinates.
The results presented here are particularly important in understanding how the leadership
characteristics of top management and the operating context of a firm influence the design and
use of management control systems. Organizations devote considerable resources to both
improving the technical design of PCSs and performance measurement systems as well as
designing appropriate structures and incentives to accompany these systems. Our findings
indicate that these systems may not achieve their desired objectives unless both the operating
context and leadership traits are considered prior to implementation. Our major contribution
relates to the findings associated with leadership style. The general management literature
devotes considerable attention to understanding how leadership style facilitates change within
organizations, influences organizational climate and improves organizational performance and yet
the accounting literature is almost silent on the how leadership style might explain divergent uses
of PCSs and performance measurement systems. Understanding the effect of leadership style on
27
control choices is important for two reasons. First, it benefits those who are responsible for the
selection and development of upper level management and second it highlights an often
overlooked factor in theories of control choices.
The study is subject to a number of potential limitations. First, the model may be subject
to omitted variable bias. Second, the model is tested using survey data and thus is subject to the
usual limitations associated with such data. We did, however, take several steps to limit concerns
with the validity of the data by providing evidence on the construct validity of each of our
measures. Our method of estimation also allows us to deal with measurement error. Nevertheless,
we concede that at least one of our constructs (PMS) appears to be measured with non-trivial
noise and our results should be interpreted keeping this potential for errors-in-variables bias in
mind. We also heed Luft and Shields (2003) warning concerning consistency in the levels of
measurement and theory. The identification of our sample ensures that the variables are relevant
to the respondents and their firms. We avoid problems associated with small sample settings by
testing our model using partial least squares estimation. Third, the model is relatively simplistic.
While this is not necessarily a limitation we recognize that organization control involves multiple
mechanisms and this study only focuses on choices relating to the delegation decision and the use
of PCSs and performance measurement system. And finally, our theoretical model is based on
causal arguments and yet our data are cross sectional. There is little that can be done to overcome
this problem and we must, therefore, rely on the theoretical arguments developed (Cook and
Campbell 1979). Despite the potential limitations of the study, this is the first study that
empirically assesses the impact of both the operating context and leadership style on the design of
organizational structures and use of management accounting systems.
28
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31


Table 1
Predictive Effects Investigated in this Study

? = no association is predicted


Path to:
Path from:
Delegation
Interactive communication use
of planning and controls
systems (PCS)
Use of performance
measurement systems
(PMS)
Endogeneous:
Delegation +(H4) +(H5)

Test variables:
Leadership style of
consideration
?(H1) ++(H2a and H2b) ?(H3b)
Leadership style of
initiating structure
?(H1) +(H2a and H2b) +(H3)


























32
Table 2

Pearson correlations between latent variables. Based on 128 observations. Data obtained from a survey of profit center managers. Diagonal entries
are the square root of the average variance extracted. The column Composite Reliability reports a measure of internal consistency as described in
Fornell and Larcker (1981).


Composite
Reliability
1 2 3 4 5 6 7
1. Delegation 0.82 0.73
2. Interactive communication use of planning and control
systems
0.81 0.18** 0.72
3. Performance measurement system 0.80 0.07 -0.36*** 0.82
4. Leadership style of consideration 0.82 -0.05 0.40*** 0.09 0.66
5. Leadership style of initiating structure 0.79 -0.06 0.31*** 0.42*** 0.25*** 0.64
6. Knowledge asymmetry 0.81 0.35*** 0.15* 0.10 -0.04 0.06 0.68
7. Interdependencies 0.91 -0.22** -0.12 -0.11 0.02 -0.04 -0.22** 0.92


Notes:
*, **, *** denotes 10%, 5%, and 1% significance levels (two-tailed), respectively.

The square root of the average variance extracted is used to evaluate the discriminant validity of the latent variables. Discriminant validity is said to
exist if the diagonal entries are greater than the corresponding off diagonal entries (Fornell and Larcker 1981).
29

Table 3
Measurement Model Results for all Latent Variables and Cross-Loading Matrix

Latent Variable Standardized
Loading
1 2 3 4 5 6 7
Delegation:
D-1 0.63*** 0.63 0.22 0.04 0.08 -0.00 0.26 -0.14
D-2 0.83*** 0.84 0.14 0.02 0.04 -0.01 0.32 -0.14
D-3 0.77*** 0.77 0.14 0.11 -0.10 -0.05 0.25 -0.17
D-4 0.68*** 0.68 -0.03 0.04 -0.22 -0.16 0.17 -0.19
Interactive
communication
use of planning
and control
systems:

IA-1 0.76*** 0.14 0.76 0.29 0.30 0.23 0.09 -0.16
IA-2 0.56*** 0.05 0.56 0.11 0.15 0.09 0.01 0.07
IA-3 0.82*** 0.22 0.82 0.38 0.35 0.27 0.18 -0.05
IA-4 0.72*** 0.05 0.73 0.18 0.30 0.25 0.09 -0.12
Performance
measurement
system:

PMS-1 0.88*** 0.01 0.32 0.88 0.06 0.40 0.08 -0.09
PMS-2 0.75*** 0.13 0.27 0.75 0.10 0.26 0.08 -0.09
Leadership style of
consideration:

LSC-1 0.76*** -0.02 0.32 -0.02 0.76 0.08 -0.14 0.04
LSC-2 0.69*** 0.02 0.19 0.04 0.69 0.25 0.01 -0.04
LSC-3 0.67*** -0.01 0.34 0.12 0.67 0.09 0.03 -0.07
LSC-4 0.49*** 0.04 0.10 0.02 0.49 0.07 -0.01 0.14
LSC-5 0.74*** -0.10 0.31 0.17 0.74 0.33 0.04 0.00
30

LSC-6 0.59*** -0.06 0.20 0.06 0.59 0.12 -0.12 0.14

Leadership style of
initiating
structure:

LSI-1 0.71*** -0.04 0.11 0.43 0.29 0.71 0.03 -0.04
LSI-2 0.70*** -0.09 0.16 0.18 0.25 0.70 0.03 -0.03
LSI-3 0.30** -0.06 0.18 0.00 0.17 0.30 0.09 0.19
LSI-4 0.52*** -0.07 0.18 0.23 0.05 0.53 0.01 0.01
LSI-5 0.73*** -0.06 0.23 0.36 0.15 0.73 0.06 -0.07
LSI-6 0.74*** 0.03 0.34 0.19 0.07 0.74 0.11 -0.06
Knowledge
asymmetry:

KA-1 0.60*** 0.13 0.04 0.11 -0.09 -0.01 0.60 -0.04
KA-2 0.71*** 0.25 0.05 -0.01 0.06 0.12 0.71 -0.17
KA-3 0.62*** 0.17 0.12 0.07 -0.01 0.03 0.62 -0.07
KA-4 0.63*** 0.16 0.04 0.04 -0.12 0.06 0.63 -0.21
KA-5 0.83*** 0.37 0.18 0.11 -0.02 0.02 0.83 -0.21
Interdependencies:

ID-1 0.94*** -0.21 -0.13 -0.11 -0.03 -0.00 -0.18 0.94
ID-2 0.89*** -0.18 -0.08 -0.08 0.08 -0.09 -0.22 0.89

Notes:
Full descriptions and descriptive statistics of the observable indicators of each latent variable are provided in Appendix 2. Standardized loadings are
correlations between the observable indicators and their associated latent variable. Estimates of 0.70 or more are desirable although in causal
modeling lower values are acceptable (Barclay et al. 1995). Denotes significance at the 1% level. Significance levels are based on t-statistics from
a bootstrapping procedure (1000 samples with replacement).

The matrix of cross loadings is the component structure matrix that shows how much each observable indicator loads on another construct than it
does on the construct it intends to measure. As such it is used to assess the discriminant validity of the model.
31
32

Table 4
Partial Least Squares Regressions
Results of Partial Least Squares analysis of a path model. Based on 128 observations. Data obtained from a survey of profit center managers. T-
statistics in parentheses are based on bootstrapping (1000 samples with replacement).

Predicted
Sign
Path to:
Path from:
Delegation
(Multiple
R2=0.15)
Interactive
communication use of planning and
control systems
(Multiple R2=0.26)

Performance measurement
system
(Multiple R2=0.19)
Endogenous:
Delegation NR, +, + 0.17*
(1.69)
0.07
(0.68)
Test variables:
Leadership style of
consideration
+, +, NR -0.01
(0.12)
0.36***
(4.77)
0.00
(0.04)
Leadership style of initiating
structure
-, +, + -0.09
(1.05)
0.23***
(2.59)
0.42***
(4.36)
Knowledge Asymmetry +, NR, NR 0.32***
(3.72)
0.07
(0.85)
0.03
(0.30)
Interdependencies -, NR, NR -0.15
(1.57)
0.06
(0.68)
-0.07
(0.70)

Notes:
, *, **, *** denotes 15%, 10%, 5%, and 1% significance levels (two-tailed), respectively. NR = no relation was hypothesized within the model.
Reported coefficients are standardized structural coefficients.



33


Appendix 1
Description of Sample

Panel A -- Industry distribution of sample profit centers (N=128)

Industry
# of profit centers % of profit centers
Manufacturing 33 25.8
Transportation 11 8.6
Utilities 4 3.1
Retail and wholesale 7 5.5
Banking and insurance 19 14.8
General services 54 42.2

Panel B Profit center and respondent characteristics (N=128)


Mean
Std.
Dev.
Min. 10
th

Pctl Median
90
th
Pctl Max.
Respondent:
Age 42.02 7.89 27.00 32 42.00 53 61.00
Experience in profit center 5.15 5.92 0.50 1 3.00 13.2 28.00
Experience in current position 3.27 3.61 0.25 1 2.00 5 22.00
Experience of respondents in
their profit center compared
with supervisor*
-1.05 8.09 -35.00 -10 0.00 5 24.00
Experience of respondents in
their industry compared with
supervisor*
-0.26 10.13 -35.00 -10 -1.00 10 37.00
Profit center:
Size (in # of full time
employees)
208.88 307.62 8 20.9 93.5 487.5 1800
*: Negative numbers denote that the respondent is less experienced than his/her supervisor












Appendix 2
Descriptive Statistics for the Observable Indicators Used in the Partial Least Squares Estimation Models (n=128)

Latent variable Label Mean Standard Deviation Minimum Median Maximum
Delegation:

We would like to compare your authority in making decisions with authority of your superior. If you and/or any of your subordinates make the
decision without the knowledge of your superior, you are considered to have all authority. Please consider the following decision areas: (1=my
business unit has all authority, 7= my superior has all authority). Cronbachs alpha = 0.71
Strategic decisions D-1 4.63 1.72 1.00 5.00 7.00
Marketing decisions D-2 3.16 1.89 1.00 3.00 7.00
Internal process decisions D-3 2.84 1.78 1.00 2.00 7.00
Human resource decisions D-4 2.77 1.52 1.00 2.00 7.00
Interactive communication
use of planning and control
systems:

Indicate the extent to which you agree with the following statements: (1=strongly agree, 7= totally disagree). Cronbachs alpha = 0.70
My superior and I often use
the planning and control
system as a means of
questioning and debating the
factors affecting the
strategy.
IA-1 3.74 2.00 1.00 3.00 7.00
The planning and control
system is continuous it
demands regular and
frequent attention from
managers at all levels.
IA-2 2.39 1.47 1.00 2.00 7.00
I use the planning and
control system to discuss
with my peers and
subordinates changes
IA-3 2.77 1.58 1.00 4.00 7.00
34

occurring in my
organization.
The planning and control
system is used throughout
the year to develop and
present new programs,
services, and strategies.
IA-4 3.93 1.85 1.00 2.00 7.00
Performance measurement
system:

Please circle the number that best reflects your superiors use of performance measures: (1=Not at all, 7=To a large extent). Cronbachs alpha =
0.52
To what extent are your
compensation/promotion
prospects related to
achieving predetermined
targets?
PMCP-1 5.06 1.53 1.00 5.00 7.00
To what extent does your
superior rely on accounting
numbers when determining
your
compensation/promotion
prospects?
PMCP-2 4.97 1.59 1.00 5.00 7.00
Leadership style of
consideration:

Indicate the extent to which you agree or disagree with the following statement about your superior: (1=Strongly agree, 7=Totally disagree).
Cronbachs alpha = 0.75
Tries out his/her ideas in the
group.
LSC-1 3.28 1.67 1.00 3.00 7.00
Puts suggestions made by
the business unit managers
into operation.
LSC-2 2.92 1.26 1.00 3.00 7.00
Makes his/her attitudes clear LSC-3 2.62 1.40 1.00 2.00 7.00
35
to the group.
Treats all business unit
managers as his/her equal.
LSC-4 3.46 1.82 1.00 3.00 7.00
Gives advance notice of
changes.
LSC-5 3.41 1.49 1.00 3.00 7.00
Looks out for the personal
welfare of business unit
managers.
LSC-6 3.66 1.54 1.00 4.00 7.00
Leadership style of
initiating structure:

Indicate the extent to which you agree or disagree with the following statements about your superior: (1=Strongly agree, 7=Totally disagree).
Cronbachs alpha = 0.69
Lets the business unit
managers know what is
expected of them.
LSI-1 2.28 1.34 1.00 2.00 7.00
Encourages the use of
uniform procedures.
LSI-2 3.00 1.56 1.00 3.00 7.00
Assigns business unit
managers to particular tasks.
LSI-3 3.26 1.72 1.00 3.00 7.00
Schedules the work to be
done.
LSI-4 4.45 1.87 1.00 5.00 7.00
Maintains definite standards
of performance.
LSI-5 3.00 1.35 1.00 3.00 7.00
Asks that business unit
managers follow standard
rules and regulations.
LSI-6 3.34 1.53 1.00 3.00 6.00
Knowledge asymmetry:
We are interested in understanding the way in which information is distributed within your organization between you and your superior. Compared
to your superior: (1=My superior has much more information, 7= I have much more information). Cronbachs alpha = 0.73
Who is in possession of
better information regarding
the activities undertaken in
KA-1 5.73 1.38 1.00 6.00 7.00
36
37
your business unit?
Who is more familiar with
the input-output
relationships inherent in the
internal operations of your
business unit?
KA-2 5.46 1.37 1.00 6.00 7.00
Who is more certain about
the performance potential of
your business unit?
KA-3 5.38 1.34 1.00 6.00 7.00
Who is better able to assess
the potential impact on your
activities of factors external
to your business unit?
KA-4 4.70 1.36 1.00 5.00 7.00
Who has a better
understanding of what can
be achieved in your business
unit?
KA-5 5.24 1.30 2.00 5.00 7.00
Interdependencies:
Please consider the relations between your business unit and other organizational units. Please indicate to what extent: (1=No impact at all, 7=A
very significant impact). Cronbachs alpha = 0.81
Your business units actions
impact on work carried out
in other business units of
your firm.
ID-1 4.44 1.80 1.00 4.00 7.00
Do actions of managers of
other business units impact
work carried out in your
business unit?
ID-2 4.34 1.67 1.00 4.00 7.00

Notes: The individual items are labeled for the purpose of cross-referencing to the tables in the main text. The theoretical range for all items is 1-7.