Effects of Formal vs Informal Management Controls

J Bus Econ
DOI 10.1007/s11573-016-0816-6
ORIGINAL PAPER
Effects of management control mechanisms:

towards a more comprehensive analysis
Sebastian Goebel1 • Barbara E. Weißenberger2
Springer-Verlag Berlin Heidelberg 2016
Abstract Even though it is widely accepted that management control systems

consist of formal (results and/or action controls) and informal mechanisms (per-
sonnel and/or cultural controls), empirical research analyzing the effects of these
management control mechanisms in a more comprehensive way is still scarce.
Based on a cross-sectional survey among 295 senior management accountants, we
examine how different management control mechanisms are related to control
system effectiveness and organizational commitment and how these two outcomes
subsequently affect overall organizational performance. Our results suggest that
particularly more informal control mechanisms are strongly associated with bene-
ficial outcomes. Our study contributes to extant literature by identifying distinct
relative effects of alternative management control mechanisms on organizational-
level outcomes. Overall, our results support the growing relevance of more informal
control mechanisms compared to prevailing formal control instruments in con-
temporary organizations.
Keywords Management control Management control systems Formal control

Informal control Structural equation modeling
JEL Classification M10 M40
& Barbara E. Weißenberger

barbara.weissenberger@hhu.de
Sebastian Goebel
sebastian.goebel@wirtschaft.uni-giessen.de
1
Former Research Associate at the Chair for Controlling and Business Accounting (BWL IV),
Justus Liebig University Giessen, Licher Str. 62, 35394 Giessen, Germany
2
Chair of Accounting, Heinrich Heine University Düsseldorf, Universitätsstr. 1,
40225 Duesseldorf, Germany
123
S. Goebel, B. E. Weißenberger
‘‘The balance between the technical and behavioural, the ‘hard’ and ‘soft’ dimensions of control suggests
a pressing need for reappraisal.’’ (Nixon/Burns, 2005, p. 261)
1 Introduction
Achieving and sustaining management control is a critical issue in virtually all

firms. Any loss of management control can lead to reputation damage, financial
distress, or even insolvency and overall organizational failure. Today, it is generally
accepted that management control is achieved by a broad array of formal as well as
informal instruments, comprising, e.g., performance measurement systems, budgets,
corporate policies and regulations, employee selection and training, codes of
conduct, or even the ‘tone at the top’ (e.g., Merchant/Otley 2007; Collier 2005;
Abernethy/Chua 1996). Still, with respect to the effectiveness of these instruments,
literature in the field of management accounting and control has traditionally
analyzed only individual management control mechanisms in isolation with a
particular focus on accounting-based controls (Malmi/Brown 2008; Widener 2007).
In a similar vein, management control practice in many organizations also primarily
relies on results-oriented controls to coordinate and evaluate employees (Mer-
chant/van der Stede 2000), even though such a largely ‘cybernetic’ command-and-
control approach often is deemed not flexible enough to accommodate for
accelerated changes in today’s corporate environment (Nixon/Burns 2005; Otley
et al. 1995). As a consequence, there is only a limited understanding of the
comprehensive effects of alternative control system elements, in particular with
respect to rather non-traditional and more informal control mechanisms that have
continually gained importance in the last decades (Tucker 2010).
Our study therefore addresses calls for research by applying a broader control
conceptualization and thus studying how different management controls relate to
each other and operate as a package (e.g., Malmi/Brown 2008; Chenhall 2003;
Abernethy/Chua 1996; Flamholtz et al. 1985; Otley 1980). More specifically, we
focus on the relative effects of formal and informal modes of control. In the last
decades, firms have increasingly refined their central ‘control philosophy’ towards
an intensified use of informal, i.e., more organic, controls to influence their
employees’ behaviors and to reduce the reliance on accounting-based performance
measures as primary means of control (Frow et al. 2010; Stringer/Carey 2002).
These changes have reinforced the growing importance of rather soft factors like,
e.g., the consideration of human capital as a key strategic resource (Widener 2004;
Youndt et al. 1996) and it is nowadays increasingly recognized that a set of well-
designed formal and informal control system elements constitutes a necessary
prerequisite for sustainable organizational success (Epstein 2008).
Still, concurrent effects of more informal control mechanisms like an adequate
employee training and development approach or the impact of a coherent corporate
culture on individuals’ behaviors have been exposed to limited academic scrutiny
and constitute a considerable research gap (Sandelin 2008; Collier 2005). Most
management accounting research thus continues to follow a rather partial approach
and addresses only partial models of organizational control structures (Berry et al.
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Effects of management control mechanisms: towards a more…
2009; Speklé 2001). However, fragmentary analyses of isolated management

control mechanisms can seriously constrain the validity and reliability of empirical
research results. Assessing only specific elements of an overall management control
system separately from other control mechanisms bears the risk of ‘‘serious model
underspecification’’ (Chenhall 2003, p. 131) and may cause unclear and conflicting
results (Sandelin 2008; Fisher 1998). The consideration of a wider control definition
that includes effects of formal as well as informal control mechanisms may
therefore provide explanations for inconclusive research results by identifying
potential complementary or substitution effects (Malmi/Brown 2008; Sandelin
2008; Bisbe/Otley 2004; Langfield-Smith 1997; Fisher 1995). This emphasizes the
imperative need for an integrated analysis of management control systems.
Recent research has started to recognize the growing importance of a more
holistic analysis. For example, Sandelin (2008) uses Merchant/Van der Stede’s
object-of-control framework (Merchant/Van der Stede 2012; Merchant 1985) to
identify different management control packages formed by formal as well as
informal controls in a European technology firm. In a similar vein, Mundy (2010)
conducts a field study in a European multinational financial services organization
and uses Simons’ (1995) levers of control framework to provide evidence on the
balancing of different control elements within the firm’s management control
system. Chenhall et al. (2010) conclude from a field study of a non-government
organization that formal management control mechanisms can either add to or
impede the effectiveness of cultural controls. Finally, Chenhall et al. (2011) address
the relationship between strategy, innovation and management control systems by
focusing on formal vs. cultural controls. Surveying 100 Russian CEOs, they find,
among others, that both types of control mechanisms have an impact on innovation,
but that managers in firms following a product differentiation strategy rely more
heavily on the latter.
Summing up, the results of existing studies consistently show that organizations
generally rely on a variety of different control mechanisms that should be analyzed
simultaneously in order to examine their respective relative effects. Our paper deals
with this research gap by addressing the research question how different formal and
informal management control mechanisms are related to control system effective-
ness and organizational commitment on an organizational level and how these two
outcomes subsequently affect overall organizational performance. For this purpose,
we develop a theoretical model based on the object-of-control framework
(Merchant/Van der Stede 2012; Merchant 1985) with respect to distinct effects of
alternative management control mechanisms. We test this model empirically using
PLS-based structural equation modeling with survey data gathered from 295 senior
management accountants of large- and medium-sized German companies. Our
research approach is thereby consistent with Otley’s (1999, p. 377) suggestions that
‘‘a more holistic approach is clearly appropriate, with the unit of analysis being the
organization’’.
Overall, our findings indicate that especially more informal management control
techniques are associated with beneficial effects. Our findings also indicate that a
simple theory of ‘the more, the better’ does not hold, especially with respect to the
use of results controls like, e.g., performance measurement systems. Rather, the
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contribution of management control systems to organizational performance results

from a combined impact of formal and informal management control elements.
Our study contributes to management control research in a threefold way. First,
we provide novel empirical evidence to an emerging research area by analyzing
control systems from an integrated point of view that addresses a comprehensive
array of alternative control mechanisms and analyzes their respective effects in a
more holistic fashion. We thus contribute to the understanding of other types of
control mechanisms besides traditional accounting-based controls. Ultimately, this
more comprehensive approach serves as a step towards the development of
improved theories of how to design effective management control systems (Malmi/
Brown 2008; Otley et al. 1995). Second, we follow Merchant et al. (2003) who have
called for more cross-disciplinary research that bridges single paradigms by
combining economic and behavioral theories. By relying on insights from agency
and stewardship theory, we are able to confirm that both theories offer
complementary explanations for differing effects of various management control
mechanisms which may contribute to an improved understanding of the overall
effects of management control system elements. Third, in addition to recent
empirical studies, which have primarily applied qualitative, case-based research
approaches in a single organization or a small number of organizations (e.g.,
Chenhall et al. 2010; Mundy 2010; Sandelin 2008), we contribute to existing
literature by relying on a comparatively large cross-sectional data set that provides a
broadened empirical basis to study the effects of management control mechanisms.
The remainder of this paper is structured as follows. First, the relevant literature
streams will be reviewed in Sect. 2. In Sect. 3, we develop several distinct
hypotheses regarding the effects of alternative management control mechanisms.
Section 4 provides a discussion of our research strategy as well as methodological
issues like, e.g., the identification of appropriate measurement instruments and the
characteristics of the chosen statistical data analysis technique. Section 5 describes
the results of our analyses. We conclude the paper with a discussion of the results
and an illustration of the contributions and potential limitations in Sect. 6.
2 Literature review
Our research is nested in two different streams of literature. First, we draw from the
broad literature on management control systems to develop our theoretical
framework. Second, we use agency theory as well as stewardship theory as
underpinning for our hypotheses regarding the effects on management control
system effectiveness and organizational commitment and how these two outcomes
subsequently affect overall organizational performance.
2.1 Management control systems
Anthony’s (1965) seminal work on management control systems is generally

referred to as starting point and seminal publication in the field of management
control systems research and it is still associated with a persistent effect on this
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discipline (Merchant and Otley 2007; Henri 2004). Anthony (1965, p. 17) defined
management control as ‘‘the process by which managers assure that resources are
obtained and used effectively and efficiently in the accomplishment of the
organization’s objectives’’ and characterized it as the process that connects strategic
planning (setting of long-term organizational objectives) and operational control
(evaluation of particular tasks). This fundamental definition has strongly influenced
subsequent researchers and has led to a predominant focus on financial account-
ability and accounting-based performance measures to conduct adequate control in
organizations (Merchant/Otley 2007; Otley 1999; Langfield-Smith 1997). However,
this rather narrow conceptualization has been critically challenged during the last
years (e.g., Johnson/Kaplan 1987) and the traditional management control
conceptualization has been refined from a primarily accounting-based view to a
more comprehensive or holistic perspective that comprises formal as well as
informal management controls. Collections of these individual management control
mechanisms are generally referred to as a ‘management control system’ (Merchant/
Van der Stede 2012; Bisbe and Otley 2004; Flamholtz 1996; Flamholtz et al. 1985)
or a ‘management control package’ (Malmi/Brown 2008; Sandelin 2008; Otley
1980, 1999).
This broadened perspective implies that proper control can be achieved by
applying two distinct control strategies (Ouchi 1979). On the one hand, control can
be conducted by relying on formal, i.e., ‘mechanistic’ (Chenhall 2003), performance
evaluation processes, extensive budgetary controls and incentive compensation
systems, detailed rules and standard operating procedures, etc. (Abernethy/Chua
1996; Falkenberg/Herremans 1995). These instruments are designed to ensure
efficient and effective work processes and to maintain financial viability (Chenhall
et al. 2010). On the other hand, organizations can influence their employees’
behaviors by utilizing informal, i.e., ‘organic’ (Chenhall 2003), control mechanisms
to promote an understanding of the overall organizational objectives and to
minimize divergent individual preferences (Eisenhardt 1985). Thus, informal
management control instruments like, e.g., selection and training approaches or the
design of an integrative corporate culture that builds on shared values and beliefs
are considered as important management control system components that affect
employees’ perceptions and actions (Sandelin 2008; Flamholtz 1996). Although
informal management control mechanisms occasionally also encompass individual
formal elements, e.g., explicitly codified statements of an organization’s mission
and core values, they are, nevertheless, considered to be relatively more informal
than formal due to their rather indirect focus.
The importance of informal control mechanisms has been increasingly recog-
nized in research and practice and they are described as means to regain the
relevance of management accounting (Otley 2001; Johnson 1992; Johnson/Kaplan
1987). In contrast to formal controls, which are based on explicit and quantifiable
standards, informal controls are less obtrusive and thus associated with fewer
disadvantages (e.g., Kerr 1975) because they affect behaviors rather indirectly
(Merchant/Van der Stede 2012). A further distinction between both control
alternatives is that formal controls are mainly associated with the allocation of
extrinsic rewards (e.g., base salary increases or higher levels of performance-
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contingent incentive compensation), while informal controls are closely related to

the provision of intrinsic rewards (e.g., increased levels of autonomy or
opportunities for personal development) that can have a more sustainable effect
on behaviors by fostering employees’ intrinsic motivation (Rost/Osterloh 2009;
Epstein 2008; Manzoni 2008). However, formal and informal control mechanisms
do not exist in isolation and it is generally acknowledged that companies rely on
both means of control in any setting (Collier 2005; Abernethy/Brownell 1997). A
thorough understanding of appropriate combinations of formal and informal
controls is therefore considered to be of high importance (e.g., Epstein 2008) since a
well-designed management control system can ultimately lead to a long-term
competitive advantage (Flamholtz 1995).
Nevertheless, despite regular calls to study this phenomenon (e.g., Malmi/Brown
2008; Chenhall 2003; Abernethy/Chua 1996; Flamholtz et al. 1985; Otley 1980),
relatively little is known about entire management control configurations in
contemporary organizations (Malmi/Brown 2008; Laitinen et al. 2004; Subrama-
niam/Mia 2003; Abernethy/Chua 1996). Consequently, Kruis (2008, p. 7) empha-
sizes that ‘‘there are hardly any studies that focus on MCSs in their entirety’’ which
leads to a ‘‘rich, but deceptive’’ (Cardinal et al. 2010, p. 51) base of control
literature. According to Mundy (2010), the overall effects of control approaches can
therefore only be evaluated by applying a holistic view that simultaneously
considers an array of different management control system elements.
Usually, management accounting research has applied a very restrictive approach
and considered only overall financial performance as a direct outcome or as a proxy
for desired effects of management control systems (Kruis 2008; Henri 2006; Otley
1999; Fisher 1995). However, Otley (1980) argued that control mechanisms are
likely to have only a small effect on organizational performance and recent research
has shown that there is no compelling evidence for a direct relationship between
alternative management controls and financial performance (e.g., Widener 2007;
Henri 2006; Bisbe/Otley 2004). Nevertheless, only a limited number of studies has
investigated other outcome variables than performance or considered indirect
effects of control system components on organizational performance (Shields et al.
2000; Fisher 1995). Particularly, there is a lack of studies that explicitly consider the
effectiveness of management control systems as an outcome, although there are
many claims in theory about this issue (Kruis 2008). For example, the effectiveness
of management control systems can be assessed in comparison to the realization of
control objectives, i.e., the avoidance of common control problems in organizations
(e.g., Ferreira/Otley 2010; Kruis/Widener 2009; Kruis 2008; Flamholtz 1996).
To empirically assess management control systems in business practice, several
conceptual typologies have been introduced in literature. These include Simons’
(1995) levers of control framework, Otley’s (1999) performance management
system framework, Malmi/Brown’s (2008) management control package frame-
work, and Merchant/Van der Stede’s object-of-control framework (Merchant/Van
der Stede 2012; Merchant 1985).
The object-of-control framework specifically classifies management controls
according to their focus and allows for a differentiation between formal (results and
action controls) and more informal mechanisms (personnel and cultural controls).
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While results controls, which consist of financial and/or non-financial target

indicators, are used to define expected results and to monitor and evaluate
employees’ performance, action controls ensure that employees conduct only those
activities that are presumably beneficial to an organization. Examples of typical
action controls are behavioral constraints or pre-action reviews, e.g., in the form of
detailed checklists and extensive standard operating procedures. In contrast to these
more formal controls, personnel controls are applied to design prerequisites to foster
individual motivation, e.g., by thorough selection and placement processes or by
appropriate employee training and development programs. Finally, cultural controls
can be used to define expected norms and values. Thus, they shape an organization’s
internal climate and influence employees’ mindsets by defining social conventions.
For our research, we will rely on the object-of-control framework for the
following reasons. First of all, the performance management system framework
(Otley 1999) is intended to be used primarily in case-based research (Merchant/
Otley 2007) and it largely ignores more informal means of control (Sandelin 2008).
Similarly, Simon’s (1995) levers of control framework focuses exclusively on
formal, i.e., explicitly codified, control system elements and it is also associated
with several conceptual ambiguities (Tessier/Otley 2012; Frow et al. 2010; Collier
2005). Although the framework proposed by Malmi/Brown (2008) includes a
variety of formal and informal control elements, it is a relatively new framework
which has not yet developed towards non-overlapping categories for different
control mechanisms. In contrast, the object-of-control framework is theoretically
well-grounded in a long line of empirical research that builds on Ouchi’s (1977,
1979) seminal control classifications (Merchant/Otley 2007). Hutzschenreuter
(2009) emphasizes that pre-testers found it easily accessible and adequate to
identify the full extent of various control forms in their respective organizations.
The object-of-control framework thus combines a broad scope of control
mechanisms with sufficient rigidity (Sandelin 2008) which supports its suitability
for our study.
2.2 Agency and stewardship theory
From a theoretical point of view, the necessity to implement management control

systems stems from the fact that decision rights are usually widespread in
organizations (Foss/Laursen 2005; Fama/Jensen 1983). According to the economic
perspective of agency theory (Arrow 1985; Holmstrom 1979; Jensen/Meckling
1976; Ross 1973), management control systems provide an instrument to align
diverging interests in delegation relationships between superiors and subordinates
(Chenhall/Langfield-Smith 2003; Falkenberg/Herremans 1995) and are able to
‘‘accommodate many alternative behavioral or economic factors’’ (Lambert 2007,
p. 264). Agency theory therefore provides a rather general theoretical mechanism to
understand the use of results controls, i.e., the use of performance measures
combined with rewards or sanctions as a part of management control systems.
Specifically, agency theory posits that these delegation relationships are character-
ized by information asymmetries and diverging objectives (see, e.g., Baiman 1982,
1990; Eisenhardt 1985, 1989; for a detailed review). Furthermore, it assumes that
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subordinates are fully rational, risk-averse, and opportunistically striving for the
realization of individual self-interests taking their potential costs and benefits into
account (Merchant et al. 2003). Institutional mechanisms are therefore required to
align conflicting objectives between superiors and subordinates whereas the choice
among different control alternatives is determined by the associated costs of
measuring behaviors vs. measuring outcomes (Eisenhardt 1985; Jensen/Meckling
1976). However, recommendations derived by agency theory primarily affect the
design of incentive compensation contracts or the specification of detailed operating
procedures as means of behavioral control and they mainly refer to the provision of
purely extrinsic rewards (Merchant/Otley 2007; Merchant et al. 2003; Eisenhardt
1985). Despite delivering important insights with respect to the design of these
control components, agency theory has been criticized for relying on rather
simplistic behavioral assumptions and for ignoring other elements of management
control systems. For example, Eisenhardt (1989, p. 71) stresses that agency theory
‘‘presents a partial view of the world that, although it is valid, also ignores a good bit
of complexity in organizations’’. Similarly, Otley (1999, p. 363) emphasizes that the
‘‘discipline of economics does not provide a sufficiently rich picture of the internal
activities of organizations to provide reliable guidance to the designers of
management control systems’’. Consequently, conclusions from purely eco-
nomics-based models need to be interpreted cautiously (Frederickson 1992). It is
therefore important to take complementary behavioral theories into account in order
to examine the effects of alternative management control mechanisms. This
integration of economic and behavioral theories is also an essential prerequisite to
understand complex organizational phenomena and to enrich theory development
(Birnberg et al. 2007; Atkinson et al. 1997).
Recently, stewardship theory, which builds on insights from sociology and
psychology, has been proposed as a complementary theory to assess the effects of
different management controls (Hernandez 2012; Grundei 2008; Donaldson 2008;
Tosi et al. 2003; Davis et al. 1997). Stewardship theory is based on the assumption
that ‘‘organizational participants are intrinsically motivated to achieve their tasks in
a pro-organizational manner’’ (Grundei 2008, p. 148). In contrast to agency theory,
it presumes that at least some employees show collectivistic and organization-
centered behaviors instead of purely self-serving motives (Merchant et al. 2003;
Davis et al. 1997). These behaviors are considered rational since they are expected
to be associated with greater utility than the realization of individual self-interests,
i.e., employees expect to benefit most from the realization of collective organiza-
tional objectives (Martynov 2009; Hernandez 2008; Grundei 2008; Davis et al.
1997). The underlying assumptions of stewardship theory therefore correspond
strongly to the foundations of ‘Theory Y’ which posits that employees will act in an
organization’s interest if the specific work context is designed properly (Tosi et al.
2003; McGregor 1960). Stewardship behaviors are, however, not fostered by formal
management control mechanisms but rather facilitated through informal control
mechanisms that strongly affect employees’ intrinsic motivation (Hernandez 2008;
Tosi et al. 2003). For example, desired employee attitudes might be enhanced
through opportunities for personal growth and achievement or greater levels of
autonomy (Hernandez 2012; Hernandez 2008; Davis et al. 1997; Donaldson and
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Davis 1991). Accordingly, stewardship behaviors can be promoted by organiza-

tional designs that empower employees instead of relying on strict monitoring
(Merchant et al. 2003; Davis et al. 1997). Since both agency theory and stewardship
theory provide complementary explanations for the effects of different control
instruments, these two theories will be used as our main theoretical basis for the
subsequent hypotheses development.
3 Hypotheses development and research model
Our first set of hypotheses relates to the relative effects of formal mechanisms, i.e.,
results and action controls, on management control system effectiveness and the
level of organizational commitment. Results controls constitute important and
widespread control mechanisms that ‘‘form the backbone of the management
control systems of many organizations’’ (Otley 2006, p. 303). These control
mechanisms can be used to define expectations, to monitor goal-attainment, and to
provide feedback on employees performance (Van der Stede et al. 2006). In
addition, they often form the basis for performance-contingent extrinsic rewards that
might affect employees’ motivation (Kominis and Emmanuel 2007). Hence, results
controls can particularly alleviate control problems caused by a lack of direction or
a lack of motivation (Merchant and Van der Stede 2012). Similarly, action controls
like, e.g., preaction reviews or standard operating procedures can reduce a lack of
direction by specifying desirable behaviors (Merchant/Van der Stede 2012). In
addition, they can also mitigate potential negative effects caused by a lack of
motivation or personal limitations through the recourse to superiors’ expertise in
regular interactions (Merchant and Van der Stede 2012).
According to theoretical propositions of agency theory, both control mechanisms
can contribute to an increased alignment of individual and organizational interests
in an incomplete information setting (Gjesdal 1982; Holmstrom 1979), whereas the
choice between a primary emphasis on results or action controls depends to a large
degree on their relative costs and the level of measurement uncertainty (Falkenberg
and Herremans 1995; Anderson and Oliver 1987; Eisenhardt 1985). The costs of
particular control mechanisms can be assessed in different ways and it might be
helpful to integrate suggestions of organizational theory to specify control-related
costs (Eisenhardt 1985). For example, results controls are particularly valuable if the
desired results can be measured precisely and if the standards of desirable
performance can be clearly defined (Snell 1992; Eisenhardt 1985; Ouchi 1977). This
necessitates that results controls ‘‘must be stable, with low noise and variation’’
(Widener 2007, p. 764), i.e., low measurement uncertainty. In such situations,
measurement costs are rather low. However, even in situations that are characterized
by high levels of uncertainty, more instead of less information is frequently needed,
i.e., results controls are still supposed to be important and to provide relevant
information (Kruis and Widener 2009; Galbraith 1973). Ouchi and Maguire (1975,
p. 568) therefore conclude that ‘‘paradoxically, output measures are used most when
they are least appropriate’’ which might be caused by a demand for quantifiable
measures. On the other hand, organizations can increase their reliance on action
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controls if the availability of adequate results measures is restricted but sufficient

knowledge of cause-effect relationships available. In contrast to organizational
theory, agency theory suggests that action controls can also be employed if specific
cause-effect knowledge is imperfect. However, additional costs may arise in these
situations, e.g., due to the need for increased personal observations, evaluative
meetings, or additional layers of management (Kirsch 1996; Govindarajan/Fischer
1990). While action controls might therefore not be well suited to guide non-routine
tasks, they nevertheless provide structure for routine tasks that can relatively easy be
specified (Merchant 1985). A non-contingent and positive direct effect has also been
found in several empirical studies (e.g., Kihn 2007; Cardinal 2001; Snell/Youndt
1995) which might provide a rationale for the common use of action controls in
many organizations (Merchant/Van der Stede 2012). In line with theoretical
propositions of the object-of-control framework (Merchant/Van der Stede 2012;
Merchant 1985), we thus state our first hypotheses as follows:
H1a Higher levels of results controls lead to an increased effectiveness of
management control systems.
H2a Higher levels of action controls lead to an increased effectiveness of
Nevertheless, these formal control mechanisms might be associated with quite
different effects on the overall level of organizational commitment which is usually
not explicitly considered in purely accountability-oriented formal control systems
(Merchant/Otley 2007; Davis et al. 1997). Several scholars have thus stressed that
results and action controls only lead to behavioral or temporary compliance at best,
i.e., behavior in conformance with mandated activities and performance levels instead
of true goal congruence which is reflected in high levels of organizational commitment
(Bouillon et al. 2006; Pfeffer 1998; Kohn 1993; Ouchi 1979). Even worse, these
controls might even be counterproductive and suppress employees’ commitment as a
result of restricted levels of autonomy and mutual trust (Donaldson 2008; Walton
1985; Ouchi 1979). Following this line of reasoning we hypothesize that:
H1b Higher levels of results controls lead to a decrease of organizational
commitment.
H2b Higher levels of action controls lead to a decrease of organizational
commitment.
In contrast to recommendations of agency theory, stewardship theory underlines
the importance of more informal control mechanisms to establish effective control.
Thus, particularly personnel and cultural controls can be employed to foster
employees’ intrinsic motivation and to ensure appropriate behaviors (Merchant and
Otley 2007; Merchant 1985). According to Merchant and Van der Stede (2012), both
control mechanisms are capable of mitigating control problems in organizations. Most
notably, they are able to reduce problems caused by a lack of direction or personal
limitations. For example, through well-developed staffing and training practices,
personnel controls can help to assure that employees are appropriately qualified and
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possess the necessary knowledge for a particular job (Campbell 2012; Snell 1992).
Similarly, cultural controls can provide guidance by stressing the importance of
organizational norms and values and by indirectly communicating expected behaviors
that might contribute to more effective management control. Both control mechanisms
are furthermore rather unobtrusive and thus associated with fewer negative side effects
compared to results and action controls (Merchant and Van der Stede 2012; Free/
Macintosh 2009). In addition, they are characterized by comparatively low costs and
they can be applied irrespective of particular task characteristics (Merchant and Van
der Stede 2012; Merchant 1985). This leads to our following hypotheses:
H3a Higher levels of personnel controls lead to an increased effectiveness of
H4a Higher levels of cultural controls lead to an increased effectiveness of
Besides their expected positive effect on management control system effective-
ness, personnel and cultural controls can also contribute to higher levels of
organizational commitment by evoking stewardship behaviors among employees. In
contrast to formal controls, these control mechanisms foster individual autonomy
and create an environment that is based on a shared understanding of the importance
of organizational objectives. This shared understanding constitutes an important
factor that influences employees’ commitment by reinforcing a sense of organiza-
tional purpose (Hernandez 2008). It might therefore be reasonable to expect that
personnel and cultural controls lead to ‘‘high commitment as a result of internalized
values’’ (Ouchi 1979, p. 841). Based on this reasoning we hypothesize that:
H3b Higher levels of personnel controls lead to an increase of organizational
commitment.
H4b Higher levels of cultural controls lead to an increase of organizational
commitment.
Finally, extant literature suggests that higher levels of management control
system effectiveness and organizational commitment also increase organizational
performance. We thus follow recent studies and assume an indirect rather than a
direct effect of management control mechanisms on organizational performance for
which there is insufficient prior theoretical and empirical evidence (Widener 2007;
Henri 2006; Bisbe/Otley 2004). According to Merchant/Van der Stede (2012),
effective management control systems can prevent common control problems and
undesired outcomes like, e.g., losses due to excessive costs or inadequate decision-
making processes that may negatively affect organizational performance. Hence,
more effective management control systems ‘‘increase the probability that the
organization will achieve its goals’’ (Merchant/Van der Stede 2012, p. 6). In
addition, higher levels of organizational commitment can also lead to superior
organizational performance. While previous studies have primarily identified effects
of individual commitment on managerial performance (e.g., Nouri/Parker 1998),
recent research suggests that this relationship holds also on organizational levels
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H1a +
Results Controls
(RC)
H1b -
MCS Effectiveness
(MCS_Eff)
H2a + H5 +
Action Controls
(AC)
H2b -
Organizational Performance
H3a + (Org_Perf)
Personnel Controls H3b +

(PC)
H6 +
Organizational Commitment
H4a + (Org_Comm)
H4b +
Cultural Controls
(CC)
Fig. 1 Theoretical research model
(Conway/Briner 2012; Winkler et al. 2012; Allen/Grisaffe 2001). Employees who

identify strongly with their organizations and show high levels of commitment are
therefore more likely to contribute to organizational objectives (Hernandez 2008;
Davis et al. 1997). Consequently, we specify our final hypotheses as follows:
H5 Higher levels of management control system effectiveness lead to an increase
of organizational performance.
H6 Higher levels of organizational commitment lead to an increase of
organizational performance.
Our theoretical research model, which is based on the hypotheses derived above,
is outlined in Fig. 1.
4 Research method
4.1 Sample selection and survey design
The data for our study was collected by means of a questionnaire-based (online) survey
from Sep. 2011 to Dec. 2011 as part of a larger research project. Potential participants
were selected from a non-public database that included 2273 large- and medium-sized
companies.1 All organizations are located in Germany which limits potential biases
caused by cultural differences (Hartmann 2005). In line with standard practice in
empirical management accounting research, financial institutions, insurance compa-
nies, and real estate organizations were excluded due to their specific business models
1
To establish this database, we started with data from the Hoppenstedt database and identified
Germany’s top 1500 companies based on consolidated revenues with the exception of financial
institutions. Companies lacking a controlling department or with a strict non-response policy were
excluded. In a second step, we added companies with meaningful revenues from the database of the
International Controller Association.
123
and divergent regulatory environments. Furthermore, we had to exclude several other

companies for various reasons (e.g., a lack of a separate management accounting
department, double counts due to changed legal forms, or recent insolvencies) which
resulted in a final sample of 1757 organizations.
Senior management accountants (heads of management accounting departments)
of these organizations constituted the target population of our study because they are
expected to possess detailed knowledge about their company’s management control
system (Auzair and Langfield-Smith 2005; Shields and Young 1993). With respect
to the design and the conceptualization of the questionnaire, recommendations from
Dillman et al. (2009) and Van der Stede et al. (2005) were closely followed. The
questionnaire was also extensively pre-tested and subsequently discussed with
several academics and management accountants in order to assess its layout, clarity,
and understandability as well as the overall content validity of the survey questions.
Moreover, a translation/retranslation procedure was conducted to ensure inter-
language validity since the survey was conducted in German language whereas most
of the survey questions were derived from English-language publications (Hartmann
2005; Daniel and Reitsperger 1991).
In total, 311 management accountants participated in our survey which results in a
very satisfactory response rate of 17.70 %. However, responses from 12 organizations
had to be discarded due to missing values. Additionally, we had to exclude 4 small
companies with less than 50 employees to ensure a reasonable size of the participating
organizations and the existence of formal management control mechanisms (Van der
Stede et al. 2006). These adjustments resulted in a final sample of 295 organizations.
Our final sample contains large- and medium-sized companies in terms of revenues
(mean = 2315 million EUR; median = 600 million EUR) and in terms of the number
of employees (mean = 8786; median = 1900). The sample furthermore comprises
organizations from a variety of different sectors with manufacturing/engineering
(12.88 %), chemicals/health care (12.54 %), consumer goods (11.53 %), and
wholesale/retail (11.53 %) being the predominant industries (Table 1).
We also checked for potential sample biases. First, we conducted a non-response
bias test by splitting the sample in four equal groups and comparing the (latent)
variable scores between early (first quarter) and late (fourth quarter) respondents by
means of non-parametric Mann-Whitney-U-tests. The rationale of this approach is
that late respondents are expected to be similar to non-respondents that chose not to
participate in the survey (Van der Stede et al. 2005; Armstrong and Overton 1977).
We found no statistically significant differences (p \ 0.05) between early and late
respondents which supports the representativeness of our sample. Second, we
assessed the existence of a common method bias using Harman’s single factor test
(Harman 1967). The results yielded no single or general factor that accounts for the
majority of covariance among the individual indicators. This indicates the non-
existence of a substantial common method bias that can be caused, e.g., by common
rater effects, consistency motives, or social desirability issues (Podsakoff et al.
2003; Podsakoff and Organ 1986). Taken together, the absence of potential biases
supports the suitability of our sample for further analyses.
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Table 1 Sample characteristics

Sample characteristics Frequency Percentage (%)
Employees
50–150 25 8.47
151–500 48 16.27
501–2500 92 31.19
2501–10,000 84 28.47
[10,000 46 15.59
Mean 8786
Standard deviation 25,176
Median 1900
N 295
Revenues (million EUR)
0–150 58 20.42
151–500 71 25.00
501–2500 106 37.32
2501–10,000 34 11.97
[10,000 15 5.28
Mean 2315
Standard deviation 5628
Median 600
Na 284
Industries
Manufacturing/engineering 38 12.88
Chemicals/health care 37 12.54
Consumer goods 34 11.53
Wholesale/retail 34 11.53
Transport/logistics 25 8.47
Automotive 23 7.80
Industrial goods 23 7.80
Utilities 19 6.44
Information technology 18 6.10
Services 15 5.08
Media/telecommunication 11 3.73
Construction 10 3.39
Other 8 2.71
a
Not all companies did provide N 295
details on revenues
4.2 Variable measurement
Most variables of our research model were measured as latent variables with multiple
indicators. Particular attention was paid to the conceptual specification and the
selection of appropriate variables from existing literature (Bisbe et al. 2007). For
example, only those measurement instruments were considered acceptable that have
123
consistently shown sufficient levels of reliability and validity. In some cases, however,
the wording of existing scales had to be slightly adjusted in order to better match the
underlying conceptual typology as well as the organizational-level perspective of our
study and to consider comments and suggestions raised by pre-testers. In general, we
applied six-point rating scales ranging from ‘does not apply at all’ to ‘does completely
apply’ as anchor labels (divergent scale labels of main constructs are indicated below).
With respect to to the even number of points, we did not provide an ‘in between’-
category to reduce acquiescence behavior and to increase operational validity as such a
category is oftentimes misinterpreted by survey respondents as ‘no opinion’ or ‘no
answer’ which impairs data quality (Bartram 2007).
The design of management control mechanisms was assessed by the following
constructs. Results controls were measured by relying on a construct that was
originally developed by Jaworski/MacInnes (1989) to evaluate the extent of ‘output
controls’ and that was subsequently used in a variety of empirical studies (e.g.,
Jaworksi et al. 1993; Cravens et al. 2004; Hutzschenreuter 2009). Overall, this
measure reflects the definition and subsequent evaluation of employees’ performance
goals. Similarly, the conceptualization of action controls builds on constructs to
measure ‘behavior control’ used by Jaworski/MacInnes (1989), Jaworski et al. (1993),
and Hutzschenreuter (2009). However, we added an additional indicator from Kren/
Kerr (1993) to quantify the reliance on corporate policies and procedures manuals in
order to create a more comprehensive measure that is in line with theoretical
underpinnings of the object-of-control framework (Merchant/Van der Stede 2012;
Merchant 1985). The extent of personnel controls was assessed by a measurement
instrument from Hutzschenreuter (2009) that builds on the conceptualization of ‘input
control’ from Snell (1992). In addition, we included an indicator used by Wargitsch
(2010) to further evaluate specific objectives of employee selection processes. Similar
items were also used by Widener (2004), although she focuses solely on staffing
procedures and pays less attention to personnel development activities. Thus, we
decided to use a more balanced conceptualization of personnel controls that
corresponds more strongly to our underlying conceptual typology. Finally, cultural
controls were operationalized by combining two indicators from Wargitsch (2010),
which build on Ouchi’s (1979) ‘clan control’ definition, and four additional indicators
from a construct used by Widener (2007) to assess an organization’s ‘belief system’.
This measurement instrument thus captures the scope of shared norms, beliefs, and
values that can influence employees’ behavior.
With respect to the effects of management control mechanisms, we measured
management control system effectiveness by relying on constructs used by Kruis
(2008), Kruis/Widener (2009), and Ferreira/Otley (2010). We adapted and refined
ideas from these authors to develop a construct that is closely related to the
theoretical propositions of the object-of-control framework (Merchant/Van der
Stede 2012; Merchant 1985). Management control system effectiveness is measured
in terms of a control system’s capability to address the three primary control
problems in organizations, i.e., lack of direction, lack of motivation, and personal
limitations. This measure thus focuses on the attainment of overall control goals
(Kruis 2008). In contrast, the level of collective organizational commitment was
assessed by relying on a construct used by Johnson et al. (2002) and
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Hutzschenreuter (2009) to evaluate the perceived scope of employees’ commitment

and identification with a company from an organizational-level perspective. This
construct essentially constitutes a modified version of a measurement instrument
proposed by Mowday et al. (1979) which Meyer et al. (1989, p. 152) denote as the
‘‘most widely used measure of affective commitment’’. To measure organizational
performance, we followed Henri’s (2006) conceptualization and added an additional
indicator that quantifies a company’s market share in order to create a more
comprehensive reflection of performance that equally captures financial and product
market performance. Consistent with previous studies (e.g., Grafton et al. 2010),
organizational performance was not assessed as an absolute but as a relative
measure that compares key performance dimensions over the last year to those of
relevant competitors using ‘much worse’ and ‘much better’ as anchor labels.
In addition, we included control variables that have been identified as particularly
influential with respect to their contextual effects on organizational outcomes. First,
we controlled for organizational size in order to account for effects caused by
increasing complexity within organizations (Chenhall 2003). We measured
organizational size using the natural logarithm of the number of employees
(Libby/Waterhouse 1996; Snell/Youndt 1995; Snell 1992). Second, we included
environmental uncertainty as a contextual variable to control for effects caused by
dynamic environments. Environmental uncertainty was measured by an adapted
three-item scale from Hartmann et al. (2010) which builds on conceptualizations
from Govindarajan (1984) and Merchant (1990).
All variables were measured on an organizational level, which is also why we
surveyed only one respondent per organization. Our level of analysis are therefore
not specific types of controls that may be chosen under given contingencies, but
rather the average universe of controls used in organizations and their general
impact. In this respect, our research is also in line with Brown et al. (2008, p. 1) who
state that the ‘‘impact control elements have on performance may be more
dependent on the existing elements of the control package than on traditional
contingency factors’’.
4.3 Data analysis technique
To analyze our research model, we employ the partial least squares (PLS) approach
that constitutes a variance-based structural equation modeling technique (Tenenhaus
et al. 2005; Chin 1998; Wold 1982, 1985). Specifically, we use the software
SmartPLS 2.0 M3 (Ringle et al. 2005). The use of structural equation modeling as a
‘second generation of multivariate analysis’ (Fornell 1987) has been increasingly
proposed to overcome limitations of more traditional statistical analysis techniques
due to its advanced features (Smith/Langfield-Smith 2004; Baines/Langfield-Smith
2003; Chin/Newsted 1999). However, the application of structural equation
modeling in management accounting studies has been fairly modest (Smith/
Langfield-Smith 2004). Consequently, several scholars have called for a more
intense use of structural equation modeling in empirical management accounting
research (Smith/Langfield-Smith 2004; Chenhall 2003; Shields/Shields 1998).
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The PLS algorithm simultaneously calculates several measurement models, i.e.,

the relationships between indicators and their respective latent constructs, as well as
a structural model which quantifies the relationship between these constructs
(Hulland 1999; Chin 1998). The objective of this modeling approach is to maximize
the explained variance of dependent constructs (Hair et al. 2011). In contrast to
covariance-based structural equation modeling techniques (Jöreskog 1973; Jöreskog
1970), the variance-based PLS approach is associated with several distinctive
characteristics that support its appropriateness for our study. First of all, the PLS
technique constitutes a non-parametric approach and does therefore not rely on
normally distributed data (Henseler et al. 2009; Chin/Newsted 1999; Chin 1998). In
addition, it is also less restrictive in terms of necessary sample size requirements and
it allows for the analysis of rather complex research models (Hair et al. 2011).
Finally, the PLS technique is also generally preferred in research areas with less
comprehensive theoretical foundations (Henseler et al. 2009; Reinartz et al. 2009)
which is a pervasive characteristic of current management control systems research
(Malmi/Brown 2008; Sandelin 2008).
While the PLS approach has been extensively used in related disciplines like,
e.g., marketing (Hair et al. 2012b), management information systems (Ringle et al.
2012), or strategic management (Hair et al. 2012a), it is also becoming increasingly
popular in top-rated management accounting journals (e.g., Hartmann/Slapničar
2012; Chenhall et al. 2011; Elbashir et al. 2011; Hall 2011; Hartmann et al. 2010;
Abernethy et al. 2010). Conditional on the specific research context, the PLS
technique might therefore be more appropriate than conventional covariance-based
structural equation modeling approaches (Hair et al. 2011). Smith/Langfield-Smith
(2004, p. 76) even emphasize that the PLS approach is ‘‘tailor-made for
management accounting research’’.
The evaluation and interpretation of our results in the subsequent section follows
the two-stage approach suggested by Hulland (1999). First, we assess the reliability
and validity of our measurement models. Second, we complement these initial
analyses by an evaluation of the structural model. This sequence ensures that the
underlying constructs are valid and reliable before examining and interpreting
specific relationships among constructs.
5 Results
5.1 Results of the measurement models
We assess the appropriateness of our measurement models in terms of their

individual indicator reliability, internal consistency reliability, convergent validity,
and discriminant validity (Hair et al. 2011, 2012b; Henseler et al. 2009).
Individual indicator reliability is evaluated based on the standardized factor
loadings of individual indicators on their respective constructs. Generally,
standardized loadings should at least be 0.7 which implies that more than 50 %
of an indicators variance is explained by the assigned construct (Henseler et al.
2009; Hulland 1999). However, lower loadings are still acceptable if other
123
indicators of a construct show sufficient loadings (Chin 1998). Hence, while

indicators with factor loadings below 0.4 should be eliminated from the
measurement model, indicators that load below 0.7 do not need to be removed
mandatorily, except in cases where an elimination leads to an increase of internal
consistency measures above suggested critical levels (Hair et al. 2011; Hulland
1999). Almost all individual indicators of our measurement models load above 0.7
on their respective constructs. Only three indicators show loadings marginally
below 0.7 but still above 0.6 which deems to be acceptable since they belong to
different constructs and other loadings of these constructs exhibit loadings well
above the recommended threshold (Barclay et al. 1995).
Internal consistency reliability is assessed by a construct’s Cronbach’s alpha
(CA) and Dillon-Goldstein’s rho as a measure of composite reliability (CR). In
contrast to Cronbach’s alpha, Dillon-Goldstein’s rho does not assume tau-
equivalence, i.e., equal factor loadings of individual indicators, which can prevent
an underestimation of internal consistency reliability (Henseler et al. 2009; Werts
et al. 1974). Several scholars therefore recommend to present CA values only for
informational purposes and to use CR to evaluate individual constructs (e.g.,
Tenenhaus et al. 2005; Chin 1998). Proposed minimum requirements range from 0.7
to 0.5 for CA (Nunnally 1967) and from 0.7 to 0.6 for CR (Tenenhaus et al. 2005;
Bagozzi/Yi 1988). Table 2 shows that all constructs used in our study display
sufficient levels of internal consistency reliability.
Convergent validity is analyzed by the average variance extracted (AVE) of
constructs. AVE values describe the average variance shared between a construct
and its associated indicators (Fornell/Larcker 1981). Generally, AVE values should
exceed a level of 0.5 which implies that a construct reflects more than half of its
indicators variance and, thus, the absence of significant measurement errors
(Bagozzi/Yi 1988; Vandenbosch 1996). As can be seen in Table 2, all constructs of
our research model exhibit high levels of convergent validity.
Discriminant validity, i.e., the extent to which a particular construct conceptually
differs from other constructs, is finally warranted if the square root of a construct’s
AVE exceeds the correlations with other constructs of the research model. This is
also referred to as the Fornell/Larcker-Criterion (Fornell/Larcker 1981). In addition,
we analyzed the cross-loadings of individual indicators which should be highest
with their associated constructs (Chin 1998). Tables 3 and 4 show that sufficient
discriminant validity of our measures can be confirmed as well.
Overall, the results of the measurement models indicate that all constructs of our
research model are characterized by sufficient levels of reliability and validity. This
supports their suitability for the analysis of structural relationships among
constructs.
5.2 Results of the structural model
In order to assess the results of the structural model, we rely on interpretations of

path coefficients, multiple squared correlations (R2), effect sizes (f2), and the
predictive relevance (Q2). Since the PLS approach does not provide conventional
goodness-of-fit indices like covariance-based structural equation modeling
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Table 2 Results of the Measurement Models

# Mean Std. Cronbach’s Composite Average variance
Items dev. alpha reliability extr.
Results controls 5 4.781 1.137 0.900 0.926 0.717

Action controls 5 3.836 0.926 0.831 0.882 0.602
Personnel controls 5 4.414 0.922 0.842 0.888 0.613
Cultural controls 6 4.099 1.001 0.900 0.923 0.668
MCS effectiveness 6 3.948 0.820 0.867 0.900 0.600
Organizational 5 4.561 0.876 0.897 0.924 0.709
commitment
Organizational 4 4.109 0.984 0.875 0.914 0.729
performance
Environmental 3 4.720 0.787 0.538 0.763 0.517
uncertainty
Size (ln) 1 7.523 1.749 n/a n/a n/a
Table 3 Discriminant validity check and correlations

1 2 3 4 5 6 7 8 9
1—Results controls 0.847

2—Action controls 0.461 0.776
3—Personnel controls 0.405 0.502 0.783
4—Cultural controls 0.320 0.444 0.643 0.817
5—MCS effectiveness 0.350 0.542 0.594 0.534 0.775
6—Organizational commitment 0.231 0.285 0.522 0.602 0.516 0.842
7—Organizational performance 0.099 0.141 0.178 0.317 0.269 0.230 0.854
8—Environmental uncertainty 0.156 0.219 0.238 0.200 0.221 0.243 0.106 0.719
9—Size 0.165 0.173 0.082 0.098 0.081 0.087 0.127 0.041 n/a
Diagonal elements are the square roots of average variance extracted statistics. Off-diagonal elements are
the correlations between constructs
techniques, sufficient evidence of model fit is warranted by reliable and valid

measurement instruments, an appropriate level of variance explained, and positive
predictive relevance (Hartmann/Slapničar 2012; Tenenhaus et al. 2005; Vanden-
bosch 1996). The results of the structural model are illustrated in Fig. 2 and Table 5.
The path coefficients of the structural model can be interpreted like standardized
beta coefficients of ordinary least squares (OLS) regressions (Henseler et al. 2009).
However, unlike traditional parametric OLS regressions, standard errors and
significance levels of path coefficients (t-values) are calculated by means of non-
parametric resampling procedures like, e.g., bootstrapping or jack-knifing (Hair
et al. 2011; Chin 1998). In line with Chin (1998) and recent studies in management
accounting research (e.g., Chenhall et al. 2011; Hartmann et al. 2010; Hall 2008),
we apply bootstrapping using 500 samples with replacement to evaluate the
statistical significance of our results.
123
Table 4 Cross-loadings
1 2 3 4 5 6 7 8 9
1—Results controls
RC_1 0.845 0.366 0.358 0.303 0.295 0.185 0.095 0.091 0.158
RC_2 0.924 0.396 0.338 0.245 0.296 0.181 0.083 0.122 0.106
RC_3 0.839 0.375 0.282 0.223 0.235 0.191 0.081 0.151 0.134
RC_4 0.885 0.473 0.433 0.352 0.359 0.258 0.107 0.170 0.147
RC_5 0.726 0.313 0.268 0.196 0.273 0.143 0.040 0.119 0.153
2—Action controls
AC_1 0.491 0.819 0.440 0.375 0.448 0.273 0.151 0.172 0.132
AC_2 0.461 0.744 0.408 0.277 0.400 0.169 0.102 0.149 0.177
AC_3 0.240 0.816 0.319 0.326 0.411 0.217 0.134 0.177 0.183
AC_4 0.341 0.841 0.414 0.441 0.457 0.256 0.105 0.173 0.151
AC_5 0.240 0.641 0.358 0.284 0.381 0.173 0.046 0.179 0.019
3—Personnel controls
PC_1 0.261 0.407 0.739 0.581 0.439 0.424 0.179 0.246 0.046
PC_2 0.348 0.485 0.811 0.496 0.522 0.437 0.110 0.197 0.123
PC_3 0.282 0.295 0.757 0.415 0.461 0.414 0.067 0.245 0.027
PC_4 0.315 0.366 0.786 0.480 0.414 0.342 0.137 0.101 0.054
PC_5 0.375 0.398 0.819 0.544 0.475 0.416 0.205 0.130 0.063
4—Cultural controls
CC_1 0.123 0.291 0.404 0.717 0.300 0.439 0.218 0.146 0.040
CC_2 0.187 0.377 0.508 0.744 0.422 0.389 0.221 0.121 -0.054
CC_3 0.291 0.353 0.515 0.846 0.408 0.472 0.298 0.183 0.140
CC_4 0.381 0.447 0.584 0.859 0.491 0.508 0.240 0.154 0.064
CC_5 0.272 0.344 0.544 0.862 0.440 0.524 0.267 0.195 0.104
CC_6 0.275 0.361 0.575 0.860 0.520 0.589 0.300 0.176 0.152
5—MCS effectiveness
MCS_Eff_1 0.292 0.426 0.452 0.386 0.789 0.383 0.174 0.194 0.038
MCS_Eff_2 0.257 0.446 0.437 0.398 0.803 0.364 0.202 0.216 0.037
MCS_Eff_3 0.304 0.492 0.547 0.516 0.830 0.517 0.299 0.174 0.124
MCS_Eff_4 0.301 0.465 0.454 0.446 0.768 0.326 0.192 0.133 0.066
MCS_Eff_5 0.229 0.363 0.460 0.413 0.773 0.417 0.207 0.177 0.061
MCS_Eff_6 0.236 0.292 0.390 0.278 0.676 0.373 0.147 0.128 0.033
6—Organizational commitment
Org_Comm_1 0.284 0.272 0.428 0.442 0.435 0.778 0.179 0.212 0.098
Org_Comm_2 0.136 0.190 0.368 0.413 0.365 0.838 0.133 0.160 0.083
Org_Comm_3 0.263 0.274 0.479 0.581 0.449 0.880 0.205 0.265 0.109
Org_Comm_4 0.151 0.205 0.422 0.507 0.456 0.846 0.210 0.226 0.024
Org_Comm_5 0.135 0.249 0.484 0.559 0.454 0.864 0.228 0.150 0.057
7—Organizational performance
Org_Perf_1 0.005 0.035 0.103 0.296 0.188 0.203 0.844 0.018 0.104
Org_Perf_2 0.123 0.168 0.197 0.272 0.265 0.222 0.918 0.126 0.119
Org_Perf_3 0.112 0.187 0.189 0.268 0.275 0.203 0.925 0.143 0.117
123
Table 4 continued
1 2 3 4 5 6 7 8 9
Org_Perf_4 0.080 0.053 0.093 0.259 0.168 0.153 0.712 0.047 0.090
8—Environmental uncertainty
Uncert_1 0.124 0.169 0.178 0.120 0.119 0.194 0.079 0.695 0.050
Uncert_2 0.130 0.175 0.131 0.114 0.161 0.162 -0.001 0.741 0.021
Uncert_3 0.089 0.133 0.195 0.187 0.190 0.168 0.134 0.721 0.019
9—Size
Size_1 0.165 0.173 0.082 0.098 0.081 0.087 0.127 0.041 1.000
Loadings of individual indicators on assigned constructs
0.030
Results Controls (0.875)
(RC)
-0.002 R2 = 45.73%
(0.056)
MCS Effectiveness
0.281 *** (MCS_Eff) 0.195 ***
(4.809) (2.768)
Action Controls
(AC) -0.063
(1.184)
R2 = 9.46%
0.306 *** Organizational Performance
(4.844) (Org_Perf)
0.234 ***
Personnel Controls (3.229)
(PC)
R2 = 40.68% 0.113 *
(1.711)
0.195 *** Organizational Commitment
(2.920) 0.456 *** (Org_Comm)
(7.065)
Cultural Controls
(CC)
Notes:
N = 295; PLS structural model with path coefficients (t-value in parentheses)
Significance level (two-tailed; based on bootstrapping with 500 drawings): * p < 0.10 (> 1.648) , ** p < 0.05 (> 1.965) , *** p < 0.01 (> 2.586)
Paths from control variables to the dependent variables are not shown in the structural model
Control variables: environmental uncertainty, size
Fig. 2 Results of the structural model
Our hypotheses H1a–H4a suggested a positive effect of different management

control mechanisms on management control system effectiveness. The empirical
results confirm our hypotheses for action controls (H2a: b = 0.281; t = 4.809;
p \ 0.01), personnel controls (H3a: b = 0.306; t = 4.844; p \ 0.01), and cultural
controls (H4a: b = 0.195; t = 2.920; p \ 0.01). In line with our theoretical
propositions, these management control instruments thus influence management
control system effectiveness by successfully addressing common control problems
in organizations. However, despite a positive path coefficient, a significant effect of
results controls cannot be confirmed (H1a: b = 0.030; t = 0.875; p [ 0.10) which
implies that results controls do not seem to affect management control system
effectiveness when controlling for other control mechanisms.
With respect to the effects of control mechanisms on the level of organizational
commitment (H1b–H4b), we find that personnel controls (H3b: b = 0.234;
t = 3.229; p \ 0.01) and cultural controls (H4b: b = 0.456; t = 7.065; p \ 0.01)
123
Table 5 Results of the structural model

Result Path coef. t value f2 value
Hypotheses/structural paths
H1a (?) RC ? MCS_Eff Rejected 0.030 0.875 –
H1b (-) RC ? Org_Comm Rejected -0.002 0.056 –
H2a (?) AC ? MCS_Eff Accepted 0.281*** 4.809 0.093
H2b (-) AC ? Org_Comm Rejected -0.063 1.184 –
H3a (?) PC ? MCS_Eff Accepted 0.306*** 4.844 0.084
H3b (?) PC ? Org_Comm Accepted 0.234*** 3.229 0.046
H4a (?) CC ? MCS_Eff Accepted 0.195*** 2.920 0.041
H4b (?) CC ? Org_Comm Accepted 0.456*** 7.065 0.197
H5 (?) MCS_Eff ? Org_Perf Accepted 0.195*** 2.768 0.030
H6 (?) Org_Comm ? Org_Perf Accepted 0.113* 1.711 0.009
Control variables
Uncert ? MCS_Eff 0.043 1.147 –
Uncert ? Org_Comm 0.109** 2.129 0.018
Uncert ? Org_Perf 0.032 0.699 –
Size ? MCS_Eff -0.018 0.665 –
Size ? Org_Comm 0.030 0.884 –
Size ? Org_Perf 0.100* 1.830 0.011
R2/(Q2)
MCS_Eff 0.457/(0.265)
Org_Comm 0.407/(0.280)
Org_Perf 0.095/(0.069)
Significance level (two-tailed; based on bootstrapping with 500 drawings)

* p \ 0.10 ([1.648), ** p \ 0.05 ([1.965), *** p \ 0.01 ([2.586)
are significantly associated with higher levels of organizational commitment.

Although both formal control mechanisms show a negative path coefficient, results
controls (H1b: b = -0.002; t = 0.056; p [ 0.10) and action controls (H2b:
b = -0.063; t = 1.184; p [ 0.10) are not significantly related to lower levels of
organizational commitment. Thus, they do not seem to be characterized by potential
detrimental effects that might negatively influence employees’ commitment.
Furthermore, we suggested positive effects of management control system
effectiveness and organizational commitment on organizational performance. The
results corroborate our hypotheses and show that both management control system
effectiveness (H5: b = 0.195; t = 2.768; p \ 0.01) and organizational commitment
(H6: b = 0.113; t = 1.711; p \ 0.10) are significantly related to organizational
performance. An analysis of the total effects furthermore indicates that, in contrast
to formal control mechanisms, more informal control mechanisms seem to
constitute the most important drivers of overall organizational performance which
supports their fundamental importance.
123
In order to validate the robustness of our findings, we additionally test for

potential problems that might be caused by high levels multicollinearity. The
variance inflation factors (VIFs) of all constructs are less than 2.0 and thus well
below commonly suggested critical thresholds (Hair et al. 2011; Widener 2007).
This indicates that multicollinearity is not an issue that affects the interpretation of
path coefficients.
Multiple squared correlations (R2) are subsequently utilized to assess the
explained variance of our dependent variables. Although some scholars have
proposed thresholds to interpret the extent of variance explained (e.g., Chin 1998),
there exists no general convention on how to evaluate different values because R2
values are basically dependent on the research design and the characteristics of the
available data (Hair et al. 2011; Jain 1994). The interpretation of R2 values thus has
to be conducted in the context of the underlying research question. An analysis of
R2 values shows that the different control mechanisms explain management control
system effectiveness (R2 = 45.73 %) and organizational commitment
(R2 = 40.68 %) very well. These two constructs subsequently explain a moderate
amount of variance of organizational performance (R2 = 9.46 %). This value can
be considered satisfactory since an organization’s performance generally depends
on many additional factors that are outside the scope of our research design.
The analysis of path coefficients and multiple squared correlations is comple-
mented by an assessment of effect sizes (f2) that are often not explicitly examined
and reported in empirical management accounting studies (Lee et al. 2011). A
construct’s effect size describes the increase of a dependent variables R2 value
relative to the amount of unexplained variance (Henseler et al. 2009). Cohen
(1988) suggests labeling effect sizes of 0.02, 0.15, and 0.35 as small, medium, and
large. Nevertheless, it has to be taken into account that this interpretation is
dependent on the overall level of respective R2 values. If R2 values are rather small,
effect sizes generally tend to be small as well. Similar to the interpretation of R2
values, the magnitude of effect sizes therefore needs to be interpreted in context.
Table 5 indicates that most effect sizes that correspond to significant path
coefficients can be considered as moderate. Overall, these results are comparable
to other studies that reported effect sizes of different control mechanisms (e.g.,
Hutzschenreuter 2009).
Finally, the predictive relevance (Q2) of our research model is analyzed by means
of the Stone-Geisser-test that builds on cross-validated redundancy indices (Geisser
1974; Stone 1974). Q2 values are calculated by a blindfolding procedure that
excludes different parts of the underlying data and uses the remaining data to
reconstruct the excluded parts (Hair et al. 2011; Tenenhaus et al. 2005). Generally, a
structural model exhibits sufficient predictive relevance if Q2 values of dependent
constructs are larger than zero (Henseler et al. 2009; Chin 1998). As can be seen in
Table 5, all Q2 values are well above zero which confirms the predictive relevance
of our model.
123
6 Discussion and conclusions
Our study provides empirical evidence of the relative effects of alternative

management control mechanisms. We will discuss our results in more detail below.
Furthermore, we will outline contributions to theory and practice as well as potential
limitations of our research design.
While it is generally accepted that organizations use a variety of alternative
control mechanisms to guide and influence their employees’ behavior, the relative
effects of these different instruments are rather unclear because they have
traditionally been examined only on a separate basis. Our analysis indicates that
on an organizational level particularly informal management control mechanisms,
i.e., personnel and cultural controls, contribute strongly to both an increased
effectiveness of management control systems and higher levels of organizational
commitment which, in turn, lead to superior organizational performance. However,
we find that the effect of organizational commitment on organizational performance
is not as strong as the effect of management control system effectiveness. A reason
for this weaker effect might be the existence of additional indirect relations between
commitment and organizational performance, e.g., mediating effects of different
psychological factors (Klein et al. 2012; Hernandez 2012).
Nevertheless, we can generally support the beneficial effects of an increased
reliance on informal controls in contemporary organizations. Our results are
therefore in line with recent studies that similarly emphasize the importance of more
informal management control mechanisms (e.g., Chenhall et al. 2010, 2011;
Hutzschenreuter 2009; Busco et al. 2008; Sandelin 2008). With respect to formal
means of control, we can only corroborate the hypothesis that action controls are
positively associated with higher levels of management control system effectiveness
which corresponds well with the results of previous studies that have identified
positive effects of these control mechanisms (e.g., Kihn 2007; Cardinal 2001; Snell/
Youndt 1995).
Interestingly, our results show that formal results controls are not associated with
an increased effectiveness of management control systems which illustrates that
these instruments might be overrated in terms of their potential benefits. These
results—albeit counter-intuitive at first sight—are consistent with recent studies in
empirical management accounting research that were also unable to confirm a
positive effect of results controls on organizational outcomes (e.g., Wargitsch 2010;
Hutzschenreuter 2009; Snell and Youndt 1995). Although we find a positive and
significant bivariate correlation between results controls and management control
system effectiveness, this relationship is not statistically significant when including
additional management control mechanisms in our structural model. Similarly,
Widener (2007) and Henri (2006) also found that certain management control
elements show significant bivariate correlations that became non-significant when
controlling for alternative control mechanisms.
A possible reason for this might be that there exists only a very weak relationship
between formal control mechanisms and the respective organizational outcome
variables after a given minimum level of formal controls has been established. If we
123
assume that all surveyed firms have implemented this minimum level, our results
might simply suggest that increasing the level of results controls beyond that
threshold will only have a very weak impact on management control system
effectiveness as well. Another reason might be that different ways of implementing
results controls in firms have strongly diverging positive and negative effects which
are not captured by measuring the level of results control usage. Our results
therefore do not support any simplistic theories assuming that increasing the level of
formal control mechanisms will lead to better organizational performance in a sense
of ‘the more, the better’. Instead, our results underline the importance of analyzing
effects of different control mechanisms simultaneously because an individual
analysis of results controls would have documented a positive effect. By applying a
more comprehensive approach, we can therefore conclude that alternative
management controls seem to be much more important than results controls. This
reasoning is also in line with research on the relations of extrinsic and other forms of
motivations (e.g., Gneezy et al. 2011; Rost and Osterloh 2009).
Our study contributes to management control literature in several ways. In
general, it addresses the limited body of knowledge regarding different management
control mechanisms in contemporary organizations and their relative effects on
organizational-level outcomes. Our analyses explicitly respond to calls to study the
diverse effects of management control mechanisms and to examine the relationship
between formal and informal controls by adopting a more holistic perspective (e.g.,
Malmi and Brown 2008; Bisbe and Otley 2004). Thus, our approach goes beyond
previous studies that have mostly focused only on different formal management
control techniques. By applying a theoretically well-grounded framework that
captures an array of different management controls, we contribute to a growing
stream of recent literature that comprehensively analyzes effects of different control
system elements in order to avoid potential biases due to partial and incomplete
research models and which has, by now, rather researched single organizations and/
or rather small samples (e.g., Chenhall et al. 2010, 2011; Mundy 2010; Sandelin
2008). Furthermore, drawing on agency theory and stewardship theory as theoretical
framework, we follow recent suggestions to combine economic and behavioral
theories (Merchant et al. 2003) and confirm the suitability of both theories to explain
diverse effects of management control mechanisms.
Since management control constitutes a major concern for almost all organiza-
tions (Berry et al. 2009), our findings also have important implications for business
practice. According to Epstein (2002), companies have to be aware of the relevant
key drivers of organizational success. Our joint consideration of formal and
informal control mechanisms provides evidence which control system elements
seem to be more important in order to foster desired employee behaviors and
sustainable long-term value creation. Instead of stressing the importance of
comprehensive formal management control techniques, organizations might benefit
from shifting their focus to more informal means of control. Hence, informal control
mechanisms should not be regarded as mere premises but rather as important control
system elements that strongly affect employees’ behaviors and subsequent
organizational outcomes (Sandelin 2008).
123
Similar to most empirical studies, our study is also subject to several limitations
that may stimulate further research. For example, we rely on perceptual data from
senior management accountants because information regarding an organization’s
control mechanisms is not publicly available. Hence, our results might be associated
with commonly mentioned shortcomings of questionnaire-based survey studies like,
e.g., individual respondents’ subjectivity and social desirability issues. Notwith-
standing this potential caveat, Venkatraman and Ramamujam (1987) emphasize that
self-ratings might be less biased than commonly expected because they tend to be
highly correlated with objective measures.
Moreover, our structural equation modeling technique is subject to all limitations
related to the choice of a variance-based method of analysis, mainly the lack of
overall goodness-of-fit measures compared to covariance-based methods. Never-
theless, PLS allows for a much more intuitive interpretation of results and does not
rely on normally-distributed data. As it is also increasingly used in accounting
research as well as related fields, e.g., marketing, information systems, or strategic
management, we consider the choice of this method, even in the light of existing
limitations, as appropriate. Furthermore, additional tests with other linear models
(e.g., OLS regressions), which were conducted as robustness checks, did not yield
any different inferences from the empirical results.
Another limitation relates to our findings regarding the non-significant effect of
results controls on management control system effectiveness which should be
interpreted cautiously for several reasons. First, results controls constitute an
important part of an organization’s management control system and they are often
used to a considerable extent. Their widespread adoption in organizations might
therefore curtail differentiating effects with respect to organizational outcomes.
Second, our used measurement instrument largely corresponds to what has been
labeled as a ‘diagnostic’ (Simons 1995) or ‘coercive’ control mechanism (Adler and
Borys 1996). However, recent studies showed that results controls can also be used
to encourage innovation or organizational learning which reflects a more
‘interactive’ or ‘enabling’ role of these control instruments that might lead to
distinct effects on organizational outcomes (e.g., Widener 2007; Henri 2006).
Subsequent studies might therefore not only consider if results controls are
implemented but also how they are applied depending on different context factors.
This also includes identifying and empirically confirming conditions that allow for a
more effective utilization of formal controls as part of a comprehensive
management control system.
In addition, the object-of-control framework does not explicitly differentiate
between the use of financial and non-financial results controls. Further research
might therefore investigate the role of differently specified results control measures
while controlling for alternative management control mechanisms. Another issue
might be the differing impact of formal vs. informal management control
mechanisms in specific contingencies which has not been addressed by our
research design but is a matter for further analysis. Whereas we assessed an ‘overall
control style’ on an organizational level, control approaches might also differ
between particular organizational departments and functions which represents an
area for further research.
123
Another limitation of our study is the number of control variables. We chose to

survey ‘environmental uncertainty’ and ‘size’ as major relevant control variables in
management control systems research from a theoretical perspective. Still, the
impact of these control variables is rather weak. This result is nevertheless in line
with, e.g., Chenhall et al. (2011), who use ‘size’ and ‘business’ as control variables
which neither have a strong control path in their model. Even though further
research should search for and survey additional control variables and/or explore the
effectiveness of management control instruments in more specific settings, our
results do not indicate that relevant control variables have been neglected in our
general setting referring to organizations as a whole. Moreover, analyzing effects of
alternative control mechanisms on an individual level with respect to specific
control situations may provide additional insights. For example, it seems reasonable
to expect that the extent of particular control problems and the effects of control
mechanisms depend, among other aspects, on employees’ individual characteristics,
e.g., psychological traits and attitudes, hierarchical level, gender, age, or other
demographic variables.
In this regard, potential endogeneity may be a limitation; not only due to such
omitted variables and their possible impact on population heterogeneity but also due
to simultaneity. Taken strictly, our model hypothesizes causality but our measure-
ment relates only to correlations between variables (Antonakis et al. 2010; van Lent
2007). For example, even though we assume that control mechanisms have an
impact on organizational performance, there might be a reverse relation as firms
with high organizational performance may simply be able to afford more costly
controls than firms with low organizational performance. Still, both concerns call
for different research designs, e.g., in the case of simultaneity for long-term panel
studies or experimental designs.
Taken together, although considerable care was devoted to an a priori theoretical
specification of the relationships between our constructs, it is not possible to
distinguish cause-and-effect relations empirically in cross-sectional studies (Wi-
dener 2007; Van der Stede et al. 2005).
Despite these potential limitations, we believe that our findings provide important
insights for theory and practice with respect to the design of management control
systems in contemporary organizations. In particular, we hope that our results might
contribute to the development of more comprehensive theories of control that
equally consider both formal as well as more informal mechanisms as fundamental
means of control which might avoid spurious findings of individual analyses.
Appendix
See Table 6.
123
Table 6 Multi-item constructs

Label Item
a
Results controls
RC_1 Specific performance goals are established for employees
RC_2 Employees’ achievement of performance goals is controlled by their respective
superiors
RC_3 Potential deviations from performance goals have to be explained by the responsible
employees
RC_4 Employees receive feedback from their superiors concerning the extent to which they
achieved their performance goals
RC_5 Variable remuneration components are linked to assigned performance goals
Action controlsa
AC_1 Superiors monitor necessary steps regarding their employees’ achievement of
performance goals
AC_2 Superiors evaluate the way in which employees accomplish an assigned task
AC_3 Superiors define the most important work steps for routine tasks
AC_4 Superiors provide employees with information on the most important steps regarding
the achievement of performance goals
AC_5 Policies and procedures manuals define the fundamental course of processes
Personnel controlsa
PC_1 Our employees are carefully selected whether they fit to our organization’s values and
norms
PC_2 Much effort has been put into establishing the best-suited recruiting process for our
organization
PC_3 Emphasis is placed on hiring the best-suited applicants for a particular job position
PC_4 Training and development activities for employees are regarded as being very
important
PC_5 Our employees receive numerous opportunities to broaden their range of skills
Cultural controlsa
CC_1 Traditions, values, and norms play a major role in our organization
CC_2 In our organization, high emphasis is placed on sharing informal codes of conduct with
employees
CC_3 Our mission statement conveys the organization’s core values to our employees
CC_4 Top managers communicate the organization’s core values to employees
CC_5 Our employees are aware of the organization’s core values
CC_6 Our employees perceive the values codified in our mission statement to be motivating
MCS effectivenessa
Our management control systems…
MCS_Eff_1 …allow for a purposeful direction of employees’ behaviors
MCS_Eff_2 …ensure the coordination of tasks in our organization
MCS_Eff_3 …facilitate our employees’ motivation
MCS_Eff_4 …ensure a proper performance evaluation of employees
MCS_Eff_5 …support internal decision-making processes
MCS_Eff_6 …provide relevant information
123
Table 6 continued
Label Item
Organizational commitmenta
Org_Comm_1 Our employees are willing to put it a great deal of effort beyond that normally expected
in order to contribute to our organization’s success
Org_Comm_2 Our employees are very loyal to our organization
Org_Comm_3 There is a high congruence of our organization’s values and the individual values of
our employees
Org_Comm_4 Our organization’s destiny is very important to our employees
Org_Comm_5 Our employees tell friends that our organization is a good employer
Organizational performanceb
Org_Perf_1 Sales volume
Org_Perf_2 Profitability (e.g., return on investment)
Org_Perf_3 Profit
Org_Perf_4 Market share
Environmental uncertaintyc
Uncert_1 Behavior of customers
Uncert_2 Behavior of competitors
Uncert_3 Behavior of suppliers
a
Scale from 1 (does not apply at all) to 6 (does completely apply)
b
Scale from 1 (much worse than competitors) to 6 (much better than competitors)
c
Scale from 1 (no influence at all) to 6 (very high influence)
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Effects of Formal vs Informal Management Controls

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Effects of Formal vs Informal Management Controls

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Effects of management control mechanisms:

Sebastian Goebel1 • Barbara E. Weißenberger2

Springer-Verlag Berlin Heidelberg 2016

Abstract Even though it is widely accepted that management control systems

Keywords Management control Management control systems Formal control

JEL Classification M10 M40

& Barbara E. Weißenberger

Achieving and sustaining management control is a critical issue in virtually all

2009; Speklé 2001). However, fragmentary analyses of isolated management

contribution of management control systems to organizational performance results

2.1 Management control systems

Anthony’s (1965) seminal work on management control systems is generally

contingent incentive compensation), while informal controls are closely related to

While results controls, which consist of financial and/or non-financial target

2.2 Agency and stewardship theory

From a theoretical point of view, the necessity to implement management control

Davis 1991). Accordingly, stewardship behaviors can be promoted by organiza-

3 Hypotheses development and research model

controls if the availability of adequate results measures is restricted but sufficient

Personnel Controls H3b +

Fig. 1 Theoretical research model

(Conway/Briner 2012; Winkler et al. 2012; Allen/Grisaffe 2001). Employees who

4.1 Sample selection and survey design

and divergent regulatory environments. Furthermore, we had to exclude several other

Table 1 Sample characteristics

4.2 Variable measurement

Hutzschenreuter (2009) to evaluate the perceived scope of employees’ commitment

4.3 Data analysis technique

The PLS algorithm simultaneously calculates several measurement models, i.e.,

5.1 Results of the measurement models

We assess the appropriateness of our measurement models in terms of their

indicators of a construct show sufficient loadings (Chin 1998). Hence, while

5.2 Results of the structural model

In order to assess the results of the structural model, we rely on interpretations of

Table 2 Results of the Measurement Models

Results controls 5 4.781 1.137 0.900 0.926 0.717

Table 3 Discriminant validity check and correlations

1—Results controls 0.847

techniques, sufficient evidence of model fit is warranted by reliable and valid

Loadings of individual indicators on assigned constructs

Fig. 2 Results of the structural model

Our hypotheses H1a–H4a suggested a positive effect of different management

Table 5 Results of the structural model

Significance level (two-tailed; based on bootstrapping with 500 drawings)

are significantly associated with higher levels of organizational commitment.

In order to validate the robustness of our findings, we additionally test for

6 Discussion and conclusions

Our study provides empirical evidence of the relative effects of alternative

Another limitation of our study is the number of control variables. We chose to

Table 6 Multi-item constructs

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