1.

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 et al., 1988, p. 5; Bass,
1990; Cannella and Monroe, 1997; Wasserman et al., 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 et al. (2008) draw on
practice2 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 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 designand 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 ameans 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 broadbased 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 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.
2. Hypotheses development
2.1. 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 et al., 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.
Much of the management literature defines leadership in typologies that include at least two
categories of leadership style.Weselect the Stogdill and Coons (1957) typology for three reasons.
First,wewant 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 et al., 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.

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 et al., 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.
2.1.1. 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 decision rights (Bushman et al., 1995; Keating, 1997; Abernethy et al.,
2004) as does the knowledge asymmetry between senior managers and subordinates (Gordon and
Narayanan, 1984; Baiman et al., 1995; Nagar, 2002; Christie et al., 2003; Abernethy et al., 2004).
What we do not 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
prespecified 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.
This is in contrast to a consideration leadership style. This style is characterized by not only a
leader concerned with the welfare of subordinates but also 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 tomake
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 twohorse 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 isnorelation between leadership style and level of delegation of decision rights to
subordinate managers.
2.1.2. Communicating interactive use of planning and 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
examining 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 relatively standardized formal process what 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 center
managers); horizontally within the firm (between profit center 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 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 amore
limited way. Amanager 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.
2.1.3. Executing the vision use of performance measurement systems (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 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.
2.2. 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 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 assumptions associated with targets and
objectives that underlie the PCS (Simons, 1990, 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 amore 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 implementingPMSto
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 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
systems.
2.3. Control variables
Wecontrol for two operating contextual factors, namely subunit interdependencies and
knowledge asymmetry, in the model used to test our hypotheses.
2.3.1. Summary of hypotheses
Table 1 summarizes the hypotheses to be tested.

3. Research method
3.1. 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 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).Werequire 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% 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 A.

3.2. 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 internal consistency
of the indicators measuring a given construct.Wealso compute estimates of the variance extracted
(again following Fornell and Larcker, 1981). This statistic measures theamountof 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 Wediscuss the measurement of all variables
below. Table 2 provides reliability statistics and the simple correlations between the constructs.
Survey items are reproduced in Appendix B.8
3.2.1. 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.
3.2.2. 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 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. 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). Onedescription represents interactive communication use, the other a
more formal diagnostic style. This method of construct validation (i.e. using two forms
ofmeasurement) 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.

3.2.3. 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 et
al., 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
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.
3.2.4. 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.
3.2.5. 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 Weuse Keatings (1997) two-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.
3.3. 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 et al., 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-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
predetermined and a fully recursive model can be estimated. As reported in footnote 55, we
conducted some additional analysis to confirm that our reasoning is consistent with the data.
4. Results
4.1. 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).Wealsofindthat 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% 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 et
al., 1993).
4.2. 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. 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 al.,
2003; Abernethy et al., 2004). Our model explains about 15% of the variance in the delegation
construct, 26% in the interactive use of planning and control systems for communication and
19% in the use of performance measures for promotion/compensation decisions construct.
5. 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.
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,wefind 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 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 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.Wealso 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 systems. 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 andwemust, 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.