Partial Least Squares Structural Equation Modelling (PLS-SEM) in

Management Accounting Research: Critical Analysis, Advances, and

Future Directions

Dr. Christian Nitzl, Postdoctoral Researcher

Bundeswehr University Munich
Institute of Management Accounting, Finance and Risk Management
Werner-Heisenberg-Weg 39
85577 Neubiberg, Germany
E-mail:

christian.nitzl@unibw.de

Abstract
In recent years, methods for analysing data in management accounting research have grown
more sophisticated. Despite the steadily growing acceptance of Partial Least Squares
Structural Equation Modelling (PLS-SEM) in different business areas, relatively little and
only indirect attention has been directed towards assessing its use in management accounting
research. Reviewing eleven top-ranked management accounting journals through the end of
2013, 37 articles are identified that use PLS-SEM. These articles are analysed with respect to
dozens of relevant criteria, including reasons for using PLS-SEM, data characteristics, model
characteristics, model evaluation and reporting. There are several critical aspects of PLS-SEM
use in management accounting research related to these criteria. It also became evident that
the capabilities of PLS-SEM are only rarely exploited in management accounting research.
The review offers recommendations to avoid common pitfalls and delivers guidance for the
advanced use of PLS-SEM in management accounting research.

Introduction
Every discipline needs to regularly review its use of statistical methods to ensure the rigour of
research and publications (Hair, Sarstedt, Ringle, & Mena, 2012). Chenhall (2012)
emphasises that accounting researchers must update their statistical skills regularly in order to
ensure the delivery of high-quality research. This is particularly true for management
accounting research because the methods for analysing data in empirical research have
become increasingly sophisticated over the last several years (Chenhall, 2012). In spite of the
clear benefits of structural equation modelling (SEM) compared to more traditional methods
of modelling (e.g., regression analysis, path analysis, ANOVA), only a relatively small
number of researchers in the field of management accounting research, in contrast to other
business areas, have actually used SEM (Chenhall & Smith, 2011; Henri, 2007; D. Smith &
Langfield-Smith, 2004). This is the case even though some management accounting
researchers have emphasised the need for SEM research early in management accounting
because it allows for the development of more holistic models (Chenhall, 2003; Hughes &
Kwon, 1990; J. F. Shields & Shields, 1998; e.g., M. D. Shields, 1997). As a secondgeneration multivariate analytical method, SEM offers high flexibility to researchers for
testing holistic models by allowing them to model multiple predictors and criterion variables,
construct latent (unobservable) variables, model errors in measurement for observed
variables, and test mediation and moderation relationships (Fornell, 1987; Hair, Hult, Ringle,
& Sarstedt, 2014).

Like any statistical tool, PLS-SEM requires that a researcher have considerable knowledge
about the method applied because it requires several choices that, if not made correctly, might
lead to incorrect conclusions. Therefore, many guidelines on how to perform PLS-SEM
studies in an appropriate way have been published in recent years (e.g., Chin, 2010; Hair,
Ringle, & Sarstedt, 2011, 2013; Hair, Sarstedt, Ringle, et al., 2012; Henseler, Ringle, &
Sinkovics, 2009; Marcoulides & Chin, 2013; Peng & Lai, 2012; Sosik, Kahai, & Piovoso,
2009). Current discussions on PLS-SEM call into question whether PLS-SEM is seen purely
as a method for replicating the results of covariance-based structural equation modelling (CBSEM) in situations when, for example, only a small sample size is available or the distribution
of data is not normal (cf. Bisbe, Batista-Foguet, & Chenhall, 2007; Fornell & Bookstein,
1982; Sarstedt, Ringle, & Hair, 2014; M. Smith, 2011). In this narrow view, the
methodological properties of PLS-SEM can easily be misinterpreted (cf. McIntosh, Edwards,

& Antonakis, 2014; Rnkko & Evermann, 2013). PLS-SEM as a component-based method
should be seen from an econometric perspective as a method that focuses on predictions, in
contrast to CB-SEM, which, as a factor-based method, adopts a psychometric perspective
(Chin & Newsted, 1999). As the paper will show, the use of PLS-SEM can be highly
beneficial to management accounting researchers when they acknowledge the econometric
(prediction orientation) aspects of PLS-SEM (Henseler et al., 2014; Sarstedt, Ringle,
Henseler, & Hair, 2014).

Lambert and Larcker (1985) provided the first study in a top management accounting journal
to mention PLS-SEM. However, because they used PLS-SEM as a robustness check for the
results of a regression analysis, they merely cited PLS-SEM in a footnote. Additionally,
Hughes and Kwon (1990) cite PLS-SEM as method for estimating structural equation models
in their contribution to management accounting. These examples show that PLS-SEM was
recognised quite early in management accounting research. Nevertheless, management
accounting research failed to adopt PLS-SEM on a broader basis in the following years in the
way that other business research areas did. D. Smith and Langfield-Smith (2004) found a
single paper between 1980 and 2001 in which PLS-SEM was used (Ittner, Larcker, & Rajan,
1997). Given the popularity of PLS-SEM in other disciplines at this time, the authors were
surprised by this finding.

The review reveals that in almost every top-tier management accounting journal at least one
paper using PLS-SEM has been published, thus indicating that management accounting
research has caught up with using PLS-SEM in recent years. For the accounting context Lee,
Petter, Fayard, and Robinson (2011) provide an introduction to the general functionality of
PLS-SEM as well as guidelines for assessing the measurement and structural models in PLSSEM, which are much in line with the above mentioned guidelines. However, in sharp
contrast to Lee et al. (2011), the findings in this review identify important areas for improving
the application of PLS-SEM in the field of future management accounting regarding the
research reasons for using PLS-SEM, data characteristics, model characteristics, model
evaluation and reporting. More importantly, contrary to Lee et al. (2011) the paper also
provides important insights in the state-of-the-art use of PLS-SEM. Furthermore, Lee et al.'s

(2011) review covered only a fraction of the relevant management accounting research
journals.1

In conclusion, the contribution of this paper is twofold. First, this paper intensely discusses
the current state of PLS-SEM based on a review of past studies in management accounting
research. Second, this paper provides an overview of important improvements in PLS-SEM
with regard to mediation analyses and the management of heterogeneous data. The aim of this
paper is to provide important recommendations for applying PLS-SEM based on the results of
the review. Such critical recommendations are vital for ensuring the rigour of research and
publications in future management accounting research when using PLS-SEM.

Survey of the Use of PLS-SEM in Management Accounting Research

The aim focus of the journal selection was to analyse a selected set of journals that publish
highly ranked management accounting research to review the use and the current state of
PLS-SEM. The survey is therefore mainly based on the journal selection of D. Smith and
Langfield-Smith (2004), who aim to provide an overview of SEM in management accounting
research. In addition to the list of D. Smith and Langfield-Smith (2004), the journal
Management Accounting Research (MAR), which has grown in importance over the last
several years as an internationally recognised journal that specialises in management
accounting (cf. Chenhall & Smith, 2011; Van der Stede, Young, & Chen, 2005), is included in
the analysis. The journals were reviewed for the period from 1980 to 2013. Two different
persons independently conducted a full text search in Google Scholar, EBSCO Business and
JSTOR Source Complete as well as in the online versions of the journals using the keywords
partial least squares and PLS. Because the search was conducted by two persons
independently, a continuous process of scrutinising the lists by an additional person ensured
that all PLS-SEM articles in the target journals were found. Table 1 shows the list of the
surveyed journals with the relevant articles. The greatest numbers of articles using PLS-SEM

Lee et al. (2011) focused on accounting in general and did not survey the journals Accounting, Auditing and
Accountability Journal (AAAJ), Accounting and Business Research (ABR), or The British Accounting Review
(BAR). However, these journals can be found in the list by Smith and Langfield-Smith (2004) as important
journals for empirical management accounting research. Moreover, Lee et al.'s (2011) list is incomplete. The
authors argue that the Journal of Accounting Research (JAR) and the Journal of Management Accounting
Research (JMAR) do not contain any articles using PLS-SEM. However, for the period reviewed in their
contribution, there is at least one article in each of these journals.

in their statistical analyses have been published in Accounting, Organizations and Society (ten
articles, 27.0%) and Management Accounting Research (seven articles, 18.9%).

- Insert Table 1 here -

Whereas D. Smith and Langfield-Smith (2004) wondered why PLS-SEM was used in only
one paper over the time period from 1980 to 2001, today one can find several articles in
practically every top management accounting journal that use PLS-SEM. The only reviewed
journal that has not published any research using PLS-SEM to date is the Journal of
Accounting and Economics (JAE). Interestingly, the first reference to PLS-SEM in the context
of management accounting can be found in JAE by Lambert and Larcker (1985), where the
authors noted PLS-SEM in a footnote. Figure 1 shows the number of articles over the last 20
years; the line indicates the cumulative numbers of articles, and the bars illustrate the absolute
numbers of articles per year (in accordance to Hair, Hult, et al., 2014). Overall, this figure
indicates that the management accounting community has adopted PLS-SEM very quickly
and on a broad scale, particularly over the last decade.

- Insert Figure 1 here -

Critical Issues in the Use of PLS-SEM in Management Accounting Research

In accordance with Hair, Sarstedt, Ringle, et al. (2012), each of the 37 articles was analysed
regarding the following key criteria: (1) reasons for using PLS-SEM, (2) data characteristics,
(3) model characteristics, (4) model evaluation, and (5) reporting. These five criteria
facilitated the identification of critical issues and common misapplications of PLS-SEM in
management accounting research. Furthermore, the selection of these key criteria allows to
compare the findings with the survey study conducted by Hair, Sarstedt, Ringle, et al. (2012).
With their focus on over 300 articles in top-ranked marketing journals, their study could be
regarded as a benchmark in a business field where the use of PLS-SEM is already wellestablished.

(1) Reasons for using PLS-SEM

Several rationales for the use of PLS-SEM have been extensively discussed in the
methodological literature (Hair, Hult, et al., 2014). Because PLS-SEM is relatively new in
management accounting, it often requires a more detailed explanation of and valid
argumentation for why it is preferred over other methods (cf. Chin, 2010). From the total of
37 studies, 33 studies (89.2%) addressed the issue of why they used PLS-SEM. The two most
frequently mentioned reasons for using PLS-SEM in management accounting research were
related to a small sample size (29 studies, 78.4%) and a non-normal distribution of data (25
studies, 67.6%). Another reason that was provided was the simultaneous estimation of
multiple and interrelated dependent relations between variables and the use of latent construct
measurement (nine studies, 24.3%). Interestingly, this reason for using PLS-SEM was not
mentioned in other survey studies (cf. Hair, Sarstedt, Ringle, et al., 2012). Although
regression analysis appears vital in management accounting research (Smith and LangfieldSmith 2004), management accounting researchers have frequently noted the usefulness of
PLS-SEM compared to regression analysis. Additional reasons for using PLS-SEM pertained
to exploratory objectives (eight studies, 21.6%) and formative measures (six studies, 16.2%).
Other substantive reasons for choosing PLS-SEM, such as the ability to leverage model
complexity (five studies, 13.5%) and prediction orientation (one study, 2.7 %), were rarely
mentioned.

- Insert Table 2 here -

PLS-SEM was originally developed by Wold (1982) for situations in which a weak theory is
being tested, for small sample sizes, and for non-normal data (cf. Bisbe et al., 2007; M. Smith,
2011). Therefore, M. Smith (2011) describes PLS-SEM as a poor mans SEM (p. 83).
However, it seems that management accounting researchers often apply these reasons for
PLS-SEM like a recipe in a cookbook without sufficient reflection. For example, at present, it
is highly questionable whether choosing this method should be based on distribution
considerations because of the existence of robust CB-SEM estimator options (cf. Henseler et
al., 2009). In contrast, other important reasons for using PLS-SEM have received only limited
attention in management accounting research. However, PLS-SEM is much more than a
method that should be used when circumstances get dirty. PLS-SEM is preferable when

prediction is the main focus of the research question (Reinartz, Haenlein, & Henseler,
2009), whereas factor-based methods such as CB-SEM are unsuitable for prediction because
of the indeterminacy problem (Rigdon, 2012, 2014; Sarstedt, Ringle, Henseler, et al., 2014).

Merchant (2012) argues that management accounting research has concentrated too much on
generalizability and statistical significance rather than on deriving useful implications for
practitioners. He argued that a typical empirical study might show that, in a broad sample, a
correlation between x and y of 0.09 is significantly different from 0 but that the size of R2 is
small. Management accounting researchers should bear in mind that a path coefficient with
0.10 can explain, at best, only 1% of the variance in the focal variable. However, a theory
should be judged less according to its assumptions than according to the empirical validity of
its conclusion (Simon, 1957). The concern that SEM focuses too much on confirmatory
aspects and not sufficiently on prediction was also noted by the inventor of PLS, Herman
Wold (Dijkstra, 2010). Jreskog (1993), an influential voice in SEM, notes that purely
confirmatory research is uncommon in SEM. Management accounting research should accept
a more predictive understanding when using PLS-SEM (D. Smith & Langfield-Smith, 2004)
and, in line with that argument, should embrace a more practical view (Merchant, 2012;
Rigdon, 2012, 2014; Sarstedt, Ringle, Henseler, et al., 2014). Accordingly, there is much
more that makes PLS-SEM interesting for management accounting researchers beyond the
fact that PLS-SEM is often more appropriate than CB-SEM for small sample sizes and nonnormal data.

An often-neglected reason for using PLS-SEM in management accounting research is that

PLS-SEM allows for easier integration of formative construct measurements into SEM. In
contrast, the constraints for accommodating formative indicators in CB-SEM often contradict
the theoretical assumptions (Diamantopoulos, 2011) and lead to identification problems
(Jarvis, MacKenzie, & Podsakoff, 2003). Even McIntosh et al. (2014) strong proponents of
CB-SEM emphasise that the decision to use PLS-SEM should be made on the basis of
whether there is a formative measurement part of the measurement model. Every formative
indicator captures a specific aspect of a latent construct. In this way, the calculated weight for
a formative indicator can be interpreted in the same way as the beta coefficient in a regression
analysis (Hulland, 1999). These estimated weights for formative measured constructs offer

researchers the possibility of identifying the importance of different success drivers (Albers,
2010). Furthermore, Rodgers and Guiral (2011) argue that formative measurements are
necessary for analysing financial and managerial data, such as assets, expenses, and revenues,
in a structural equation model. Management accounting researchers should take the two
arguments, formative measurements and predictive relevance, much more into consideration.
Because of the causal-predictive characteristic of PLS-SEM, it is tailor-made for management
accounting research that is searching for the practical relevance of academic research.

(2) Data characteristics

The most prominent argument for choosing PLS-SEM in management accounting is to
accommodate small sample sizes. Using a simulation study, Reinartz et al. (2009) show that
PLS-SEM is often more appropriate than CB-SEM when the sample size is smaller than 250.
For empirical management accounting research using survey studies, the mean sample size is
239, and the median sample size is 125 (Van der Stede et al., 2005), thus indicating that small
sample sizes are a relevant argument for the use of SEM in management accounting (D. Smith
& Langfield-Smith, 2004). As shown in Table 3, the average sample size in the review was
138 (median=105). This average sample size is considerably lower than 292, which was
reported for 41 management accounting studies using CB-SEM in the time period from 1980
to 2005 (Henri, 2007). In the present survey, the smallest sample size used was 18 (Anderson,
Hesford, & Young, 2002), and the largest sample size used was 359 (Dowling, 2009).
Although 19 studies (51.4%) addressed non-response bias, only four studies (10.8%) reported
the important subject of detecting influential observations (outliers) and their treatment.
Moreover, only four studies (10.8%) reported the exact treatment of missing values or the
steps taken to control for common biased variance. Because one of the most cited reasons for
PLS-SEM in management accounting research is that it can handle non-normal data, it is
somewhat surprising that only two studies (5.4%) reported the indicator data for a normal
distribution (e.g., skewness and kurtosis).

- Insert Table 3 here -

The oft-cited sample size rationale for using PLS-SEM in management accounting has been
intensely debated for many years (e.g., Henseler et al., 2014; Marcoulides & Chin, 2013;
Rnkko & Evermann, 2013; D. Smith & Langfield-Smith, 2004). It is also one of the most
misused arguments (Goodhue, Lewis, & Thompson, 2012; Marcoulides & Saunders, 2006).
However, some contradictions should be resolved when considering that the meaning of
sample size in SEM is important in two different ways. First, PLS-SEM shows better
convergence characteristics than CB-SEM for small sample sizes (Henseler, 2010). Chin and
Newsted (1999) show that PLS-SEM can deliver initial interpretable results starting with a
sample size of 20 observations. PLS-SEM can even be used if the number of observation is
smaller than the number of manifest or latent variables (Henseler et al., 2014). Therefore,
PLS-SEM can often be applied when other methods fail due to a small sample size. This
characteristic supports the exploratory nature of PLS-SEM (Henseler et al., 2014).

The second issue relevant to the sample size argument is the role of inference statistics, i.e., to
increase statistical power. In contrast to CB-SEM, PLS-SEM has a tendency to underestimate
inner-model relationships (Bentler & Huang, 2014; Dijkstra, 1983, 2014). Therefore,
researchers often prefer CB-SEM over PLS-SEM (cf. M. Smith, 2011). Nevertheless, the
results of the path coefficients in PLS-SEM become more accurate as the sample size grows
(Hui & Wold, 1982; Reinartz et al., 2009). A management accounting researcher should
always be aware that PLS-SEM estimations accompanying a questionably small sample size
may deliver unstable estimations that cannot be used for valid practical conclusions.

Therefore, it is highly questionable that only four studies (10.8%) in the review verified
having adequate sample sizes. PLS-SEM should not be used as an autopilot for small
sample sizes. According to the rule of thumb of 10 cases per indicator espoused by Barclay,
Higgins, and Thompson (1995), only four studies (10.8%) in this review did not meet the
minimum required sample size. However, the oft-cited generic rule of thumb of 10 is not a
reliable rule for determining a necessary sample size for PLS-SEM (Marcoulides & Chin,
2013). Because PLS-SEM essentially builds on OLS regression, researchers can revert to
statistical power analyses for multiple regression models (Cohen, 1992) for deriving a rational
sample size. Statistical power is the probability of accepting the alternative hypothesis when
the alternative hypothesis is true. In other words, it is the ability of a test to detect an effect if

an effect actually exists. This is how researchers gain insight into the true state of affairs. The
statistical power is a function of the effect size (f2), sample size (n), number of predictors and
significance level () (Faul, Erdfelder, Lang, & Buchner, 2007). To determine the necessary
sample size for PLS-SEM, a management accounting researcher should initially determine the
statistical power. For business studies, a statistical power of at least 0.8 at an level of 0.05 is
considered acceptable (Cohen, 1988; Hair, Black, Babin, & Anderson, 2010). Furthermore,
management accounting researchers must decide how strong the relative effects are that they
aim to detect. For example, to detect weak relative effects, much higher sample sizes are
needed. The strength is measured with the help of effect size (f2), whereas values of 0.02, 0.15
and 0.35 indicate whether an exogenous variable has a relatively small, medium or large
influence, respectively (Cohen, 1988). To calculate the necessary sample size, a PLS-SEM
researcher also needs to determine the largest regression in the iteration process (Chin &
Newsted, 1999). To do so, he must identify the variable with the greatest number of
predictors, which is the variable in the inner structural model or in the outer measurement
model (formative) with the most incoming arrows. Table 4, which follows, shows how the
sample size depend on the number of predictors, the effect size, and the significance level for
the statistical power of 0.80.2

- Insert Table 4 here -

To detect a medium effect size of 0.15 with five predictors (the median value of the predictors
in this review), a necessary sample size of 92 at a significance level of 0.05 was required.
Because the average sample size in the review was 138, there appears to be no problem with
respect to the necessary sample size. However, at the level of the individual studies, 15
(40.5%) did not exhibit the necessary sample size for detecting at least medium effects
(=0.05). Furthermore, Table 4 shows that the necessary sample size became very high for
detecting small effects (f2=0.02). No single study in the review revealed the necessary sample
size for detecting small effects. Nevertheless, management accounting researchers should bear

The necessary sample size was calculated using the free download (http://www.gpower.hhu.de/) of the program
G*Power 3.1.9.2 (Faul, Erdfelder, Buchner, & Lang, 2009; Faul et al., 2007). The following settings for the
calculation were used: "F test" (test family), "Linear multiple regression: Fixed model, R2 deviation from zero"
(statistical test) and "A priori: Compute required sample sizes given , power, and effect size" (type of power
analysis).

10

in mind that small effects only explain, at best, 2% of the variance of a variable and therefore
have only minor practical relevance. Hence, it seems quite reasonable for management
accounting research to proceed from the minimum sample size for detecting medium effects
in PLS-SEM.

(3) Model characteristics

Table 5 provides an overview of the model characteristics in our survey. On average, the
number of latent variables was 6.16, which is lower than 7.94, the number that was reported
for PLS-SEM in marketing (Hair, Sarstedt, Ringle, et al., 2012). However, the number of
inner-path relations was 11.43, which was higher than the reported number of path relations in
marketing, 10.56 (Hair, Sarstedt, Ringle, et al., 2012). These findings mean that the latent
variables tend to be more frequently connected using PLS-SEM in management accounting
research than in marketing research. The vast majority of articles in management accounting
research (78.38%) used the reflective measurement approach for measuring latent constructs.
Eight models (21.62%) used both reflective and formative measures. In comparison with the
PLS-SEM reviews noted above, in no other research field have formative measurement
models been less used than in management accounting research. This is surprising because
using formative measurement can be highly beneficial to management accounting research.
Furthermore, Rodgers and Guiral (2011) show that 79% of the studies that use SEM in
general

accounting

journals

potentially

suffer

from

problems

of

measurement

misspecification. Often, formative measurements are defined as reflective measurements that

can lead to invalid inner-model estimation. The average numbers of indicators were 3.83 for
reflective construct and 4.44 for formative constructs. These results show that management
accounting researchers do not fully take advantage of the capabilities of PLS-SEM for
estimating more complex models with formative measurement and a larger number of
constructs.

- Insert Table 5 here -

PLS-SEM allows the unrestricted use of single items. In this survey, nearly one out of every
three contributions (12 studies; 32.43%) used single items for construct measurement in its

11

model. However, management accounting researchers should pay close attention when using
a single item for construct measurements because, in most cases, single items do not perform
as adequately as multi-item measurements (Diamantopoulos, Sarstedt, Fuchs, Kaiser, &
Wilczynski, 2012; Sarstedt & Wilczynski, 2009). Due to the consistency at large
characteristic, five to six items per construct should be the goal in PLS-SEM (Lohmller,
1989; Reinartz et al., 2009). Moreover, focusing on the predictive function of PLS-SEM also
means that a higher number of observed variables for each conceptual construct is useful
because a higher number of observed variables also improves the accuracy of forecasts
(Rigdon, 2014).

Furthermore, management accounting researchers should be careful when using categorical

(binary) data. One study in the survey used a single binary indicator to measure a choice
situation with an endogenous construct. However, due to the basic premise of the OLS
algorithm, the use of categorical variables as endogenous variables is not possible under a
standard implementation of PLS algorithms (Jakobowicz & Derquenne, 2007; Lohmller,
1989). Binary variables should only be used as exogenous single-item construct
measurements.

(4) Model evaluation

The reliable and valid measurement of latent constructs is a prerequisite for accurately
estimating an inner model in SEM. In accordance with Bisbe et al. (2007), a sound
conceptualisation of measurement constructs in management accounting is crucial. For model
measurement evaluation, researchers first need to distinguish between reflective and
formative measurements (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003; Podsakoff,
MacKenzie, Podsakoff, & Lee, 2003). The typically used internally consistent view of
reflective measurements cannot be applied to formative measurements. Lee et al. (2011)
provide a useful guideline for the evaluation of outer models in PLS-SEM.

Table 6 shows the findings of the reviewed management accounting journals. From the total
set of articles analysed, 28 studies (75.7%) reported the loadings for their reflective
measurements, which are the bivariate correlation between the indicators and their latent

12

constructs. A total of 32 studies (86.5%) reported the composite reliability, and 18 studies
(48.7%) reported Cronbachs alpha (Cronbach, 1951). This latter statistic is the most
commonly used measure of internal consistency in the CB-SEM context (Davcik, 2014;
Henri, 2007). However, because Cronbachs alpha assumes that all indicators are equally
reliable, it generally underestimates the internal consistency reliability in PLS-SEM.
Therefore, composite reliability provides a more appropriate measure in a PLS-SEM context
(Werts, Linn, & Jreskog, 1974). Following this reasoning, it should be critically noted that
five studies relied on Cronbachs alpha alone (13.5%) for the evaluation of internal
consistency reliability. Some researchers interpret Cronbachs alpha as a lower bound of
reliability because of this tendency toward underestimation. However, this is only the case
under certain conditions, e.g., with uncorrelated error terms (Raykov, 2001). Therefore,
Cronbachs alpha should not be considered a reliable criterion in PLS-SEM (Marcoulides &
Chin, 2013). Convergent validity was assessed using the average variance extracted (AVE)
value in 31 studies (83.8%). Moreover, discriminant validity was tested using either the
Fornell-Larcker criterion (Fornell & Larcker, 1981) in 33 studies (89.1%) or more liberal
criteria with the help of cross-loadings in 21 studies (58.33%).

Despite the clear advantage of PLS-SEM when conducting formative measurements, only
eight studies (21.6%) incorporated formative measurement for at least one latent construct.
The principles underlying formative measurements are fundamentally different from
reflective measurements; therefore, their assessment process is also different (Petter, Straub,
& Rai, 2007). The most common statistics by which to assess formative measurements are
indicator weights, which were reported in five studies (62.50%). A formative indicators
weight represents the relative contribution of the indicator to forming the latent construct
when the influences of all other indicators are controlled (Cenfetelli & Bassellier, 2009). A
total of six out of eight studies (75.00%) reported the significance of the weights (t-values or
p-values). As with multiple regression (Hair et al., 2010), high collinearity between formative
indicators can bias the significance of weights because it increases the standard errors
(Cenfetelli & Bassellier, 2009). Five studies (62.50%) assessed multicollinearity using the
variance inflation factor (VIF).

- Insert Table 6 here -

13

After the reliability and validity of the measurements have been ensured, an evaluation of the
inner model is possible. PLS-SEM uses the sample data to obtain parameters that minimise
the variance (prediction orientation). In contrast, CB-SEM uses the sample data to estimate
parameters that minimise the difference between the empirical covariance matrix and the
covariance matrix estimated by the model (Hair, Hult, et al., 2014). CB-SEM can yield a very
good global fit index, but at same time, the coefficient of determination (R2) can be extremely
low. By contrast, a goodness-of-fit statistic does not exist for PLS-SEM, and alternative
statistics are inappropriate for evaluating overall model fit (Henseler & Sarstedt, 2013).
Therefore, researchers must rely on variance-based, distribution-free evaluation criteria that
reflect the predictive capabilities of PLS-SEM (Table 7).

- Insert Table 7 here -

The coefficient of determination (R2) measures predictive accuracy. Hence, it is the central
criterion for judging the quality of PLS-SEM. From all of the studies investigated, a total of
35 studies (94.6%) in management accounting research reported R2. Only 43.9% of
management accounting studies using CB-SEM reported R2 (Henri, 2007). A second
important criterion for the evaluation of a model is the effect size (f2), which was reported in
only three studies (8.3%). In addition, the cross-validated redundancy measure Q2 can be used
to assess predictive relevance (Wold, 1982). To calculate Q2, a PLS-SEM model must be
repeatedly re-estimated while systematically excluding data points from the target construct
(Rigdon, 2013). Although Q2 is a very appropriate criterion for the prediction-oriented PLSSEM (Sarstedt, Ringle, Henseler, et al., 2014), only four studies in management accounting
(10.8%) reported Q2. In line with f2, q2 also assesses the relative impact of a certain exogenous
latent variable on an endogenous latent variable using the changes in Q2 (Chin, 1998).
However, none of the reviewed studies reported q2. To test the predictive orientation of a
measurement model in PLS-SEM, management accounting researchers should use further
statistical criteria, such as f2, q2 and Q2, because valid overall fit criteria do not exist.

14

In addition to assessing the predictive quality of PLS-SEM, evaluating the standardised path
coefficients is important when deciding whether the hypothesised relationship can be found in
the data. All reviewed studies reported the absolute values and the significance levels (tvalues or p-values) of the path relations. However, management accounting researchers have
relied too heavily on the statistical level and have paid insufficient attention to the absolute
size of a path relation in their interpretations. Researchers should also consider the absolute
size of a path coefficient because even when a relationship is significant, it might be too small
to warrant managerial attention (cf. Hair, Sarstedt, Hopkins, & Kuppelwieser, 2014).

The analysis of inner models is not limited to direct relationships. Mediation and moderation
effects become particularly relevant when models increase in complexity, as can be observed
in management accounting research over the last several years (cf. Chenhall, 2012; Chenhall
& Moers, 2007; Hartmann & Moers, 1999). In the review, twelve studies (32.4%) included an
explicit mediator analysis. Furthermore, six studies conducted a moderation analysis with
categorical variables (16.2%), and three conducted a moderation analysis with continuous
variables (8.1%). Group comparisons infrequently include the necessary information for the
assessment. For example, with respect to the frequently used Chin test (Chin, 2000), no study
reported whether the variance was tested for equality (Sarstedt & Mooi, 2014) or addressed
the issue of measurement invariance (cf. Haenlein & Kaplan, 2011; Ringle, Sarstedt, &
Zimmermann, 2011). Particularly in the areas of mediation and moderation, a high potential
for future research in management accounting exists (cf. Hartmann & Moers, 1999, 2003).
Therefore, this potential will be discussed in more detail in the section Future Useful
Directions for PLS-SEM in Management Accounting Research.

(5) Reporting
Reporting plays a central role in the communication of SEM results (Hoyle & Panter, 1995).
Chin (2010) notes that, in addition to information on the population and sample structures, the
distribution of the data, the theoretical model, and the statistical results, information on the
specific details related to the software, computational choices, and parameter settings is also
important in PLS-SEM reporting (cf. D. Smith & Langfield-Smith, 2004). Furthermore, clear
reporting is essential for the reproducibility of a study and gives researchers the opportunity to

15

test alternative models. Therefore, such reporting is vital for the process of knowledge
accumulation in a research area (Henri, 2007).

Whereas nearly all studies in management accounting reported information about the sample
structure (100.0%), model structure (100.0%), and the measurements used (94.44%), little
information was provided on computational and parameter settings. A total of 25 out of 37
studies (67.6%) reported the software package that was used for the estimations. Of those
providing this information, 15 studies used PLS Graph (Chin, 2003b), and the remaining ten
studies used SmartPLS (Ringle, Wende, & Will, 2005). Because these programs rely on
default settings, reporting which software package was used automatically provides some
additional information on the initial values for outer model relationships, parameter settings,
computational options, and the maximum number of iterations as the stop criterion.

Apart from the information regarding which software package was used, there are other areas
of reporting to which future management accounting studies should give additional attention.
The first area is reporting the computational options that are used for estimating the inner
model. There exist three main schemes (centroid, factor weighting, and path weighting) for
the calculation of inner weights in PLS-SEM (Henseler et al., 2009; Tenenhaus, Esposito
Vinzi, Chatelin, & Lauro, 2005). None of the reviewed studies in management accounting
provided information about the weighting scheme it used. Moreover, not every weighting
scheme is appropriate in every situation. For example, the path-weighting scheme is the
standard weighting scheme and provides the highest R2 values for endogenous variables,
whereas the factor scheme offers some advantages when multicollinearity is a critical factor
(Hair, Hult, et al., 2014). In the case of higher-order models in PLS-SEM, the centroid scheme
should not be used.

Additionally, with respect to statistical reporting in management accounting research, more

technical details concerning the resampling procedures are necessary. Because PLS-SEM is
not built on the assumption of normally distributed data, it relies on a nonparametric bootstrap
procedure for testing coefficients for their significance (Hair, Hult, et al., 2014). Of the 37
studies analysed, a total of 30 studies (81.1%) noted the use of bootstrapping (29 studies) or

16

jack-knifing (one study), which surpassed the 66.2% rate found in marketing research (Hair,
Sarstedt, Ringle, et al., 2012). However, most studies in management accounting that used
PLS-SEM typically only reported the number of bootstrapped subsamples (e.g., 500) but not
precisely which resampling procedure was used. Additional reporting is necessary, for
example, because the sign change option recommended by Henseler et al. (2009) is more
likely to indicate a significant path when the path coefficient is close to zero compared to the
no sign change option (Hair, Sarstedt, Pieper, & Ringle, 2012). Furthermore, reporting the
sample number of bootstraps is important because using a smaller number as the original
sample size considerably deflates standard errors (Chernick, 2008).

Future Useful Directions for PLS-SEM in Management Accounting Research

There are two topics of interest for future management accounting research upon which this
field should focus greater attention. The first is mediation analysis, which examines whether
and to what extent an exogenous variable exerts its influence on an endogenous variable
through other variables. The ability to test mediating effects as part of a complete model is
one of the key advantages of PLS-SEM versus regression analysis (MacKinnon, Fairchild, &
Fritz, 2007). Considering such a process is important for understanding what relationships
improve or suppress the influence of the mediated variable (cf. M. Smith, 2011). As shown in
the review, nearly one-third of the studies in management accounting performed a mediation
analysis. However, mediation analysis should not be reduced to a few simple steps as part of a
thoughtless routine. Instead, such analysis requires a deep understanding of the mediation
process and a careful analysis of data. Nevertheless, the analytical tools researchers use in
their PLS-SEM studies in management accounting to test mediation effects often do not
conform to the progress made in the literature on statistical methods. Almost all publications
in management accounting follow a direct or indirect procedure in PLS-SEM that is similar to
the causal-step approach proposed by Baron and Kenny (1986). More recent methods of
mediation analysis are based on bootstrapping, which should also be the method of choice in
future research in management accounting when using PLS-SEM (Coelho & Henseler, 2012;
Klarner, Sarstedt, Ringle, & Hck, 2013; Preacher & Hayes, 2008). Mahama and Cheng
(2013) provided one of the first studies in management accounting to use a modern method of
testing mediation effects based on the bootstrapping approach proposed by Hayes (2009).
However, the authors did not use bootstrapping results that were generated directly from a
PLS-SEM program. This approach can be problematic due to the fixed model when only the

17

latent variables scores are used. It is also important that the indirect effect be the basis of
interpretation in future management accounting research when interpreting mediation effects
(Zhao, Lynch, & Chen, 2010). For example, the direct effect may not change after the
integration of a mediator variable, but the mediation effect is nevertheless significant. This
phenomenon would indicate that at least a second mediation has gone undiscovered.
Furthermore, management accounting researchers often test complex path models that may
include multiple relations between one or more independent variables and one or more
mediator variables (e.g., Hartmann & Slapniar, 2009). Preacher and Hayes (2008) argue that
the incorporation of multiple mediators and the comparison of their specific mediation effects
are useful for comparing different competing theories. The bootstrapped confidence intervals
provided in PLS-SEM can easily be extended in such cases to test the significance of the
difference between two specific mediation effects (cf. R. S. Lau & Cheung, 2012).

Another important topic for management accounting is the modelling of heterogeneous data,
which can lead to invalid results when special considerations are not made (cf. D. Smith &
Langfield-Smith, 2004). The typical approach to examining heterogeneity in management
accounting research is the inclusion of a moderator variable (cf. Hartmann & Moers, 1999,
2003). Often, the direct influence of an exogenous variable on an endogenous variable is
systematically influenced by a third variable (Baron & Kenny, 1986). Moderator variables
must be traced backed to observed variables. Henseler and Fassott (2010) and Rigdon, Ringle,
and Sarstedt (2010) provide an overview of different approaches for estimating moderating
effects in PLS-SEM. Furthermore, Henseler and Chin (2010) provide a comparison of the
different approaches for modelling moderating effects in terms of predictive and statistical
power. A special case of moderator analysis is multigroup analysis. For multigroup analysis,
it is assumed that the moderator variable is categorical and affects all path relationships in the
inner model. Keil et al. (2000) propose a standard independent-sample t-test to compare the
individual path relationships of two models. This approach is also typically used in
management accounting to compare two groups. However, this approach implies a normal
distribution, which stands in contradiction to the assumption of PLS-SEM as a distributionfree method. Hence, nonparametric approaches have been introduced (Chin, 2003a; Chin &
Dibbern, 2010; Henseler, 2007, 2012; Nitzl, 2010; Nitzl & Hirsch, 2013). As shown above,
six studies in the review performed such a group comparison, but none of these studies used
the distribution-free approach. A disadvantage of the methods noted is that they can only

18

compare two groups at once. Therefore, Sarstedt, Henseler, and Ringle (2011) present an
omnibus test of differences between more than two groups of data. However, it is not possible
in every situation to identify heterogeneity with the help of observable variables (Hair, Hult,
et al., 2014). Hence, management accounting researchers should routinely use latent class
techniques for testing when a relevant heterogeneous data structure exists (cf. Becker, Rai,
Ringle, & Vlckner, 2013; Hair, Sarstedt, Ringle, et al., 2012). Approaches to detect
unobserved heterogeneity include finite-mixture PLS (FIMIX-PLS) and prediction-oriented
segmentation (PLS-POS) (Becker et al., 2013; Sarstedt, Becker, Ringle, & Schwaiger, 2011).
Unfortunately, no management accounting study in the review used such a method. However,
a few examples of FIMIX-PLS application have been provided in Money, Hillenbrand,
Henseler, and Da Camara (2012), Navarro, Acedo, Losada, and Ruzo (2011), Rigdon, Ringle,
Sarstedt, and Gudergan (2011), and Sarstedt, Schwaiger, and Ringle (2009).

Conclusion
The review shows that PLS-SEM has become an important tool for data analysis in
management accounting. Almost every top journal in management accounting has published
at least one article using PLS-SEM for data analysis. Most studies meet many requirements
for PLS-SEM analysis; nonetheless, there are important areas for improvement. Based on the
review, management accountants should pay attention to the following topics. (1) They
should concentrate more intensely on the predictive orientation as a reason for using PLSSEM as a component-based method (including the use of formative measurements). (2) The
necessary sample size for a specific PLS-SEM should be checked by means of a power
analysis to detect at least medium-sized effects. (3) Multiple items should be used for
construct measurement whenever possible, whereas binary-coded items should be used very
carefully (e.g., not used as dependent variables). (4) Pursuant to the goal of prediction,
additional criteria for inner model evaluation (e.g., predictive relevance and effect size)
should be used. (5) Reporting the technical and computational options used for estimation in
PLS-SEM (e.g., the bootstrapping procedure and weighting scheme) should not be neglected.
Beyond these areas, it should be emphasised that the main objective of empirical research in
management accounting is prediction (cf. Merchant, 2012), or as Simon (1957) argues,
economic models should be judged less according to their assumptions than according to the
empirical validity of their conclusions.

19

In addition, the review shows that the methods used in PLS-SEM for mediation and
moderation analysis in management accounting are often outdated. Future management
accounting research should place more emphasis on mediation analyses that focus on the
testing and interpretation of indirect effects based on bootstrapped results. Furthermore, to test
group differences in PLS-SEM, a distribution-free method should be employed. To detect
whether an unobserved heterogeneous data structure biases the inner path model, for example,
a finite-mixture PLS (FIMIX-PLS) can be used.

Like every analytical method, PLS-SEM also has certain constraints and should not be used
thoughtlessly. There are two sides to every coin: on one side, PLS-SEM delivers a high
degree of freedom; on the other side, a researcher must use it meticulously in a highly
responsible manner. If the several choices involved in performing PLS-SEM are made
incorrectly, the model will negatively influence the reliability and validity of the results. In
recent years, the use of PLS-SEM has become more sophisticated; therefore, management
accounting researchers must improve their knowledge of PLS-SEM (cf. Chenhall, 2012;
Chenhall & Smith, 2011). Hence, this article presents a review of PLS-SEM usage in
management accounting research and provides guidelines and recommendations for applying
PLS-SEM that may be important for maintaining the rigour of research and publication
practice in management accounting research.

20

Table 1. PLS-SEM Studies in Top Management Accounting Journals

Accounting, Auditing and Accountability Journal (AAAJ)
Ferreira, Moulang, and Hendro (2010)
Verbeeten (2008)
Accounting and Business Research (ABR)
Hartmann and Maas (2011)
Sholihin and Pike (2009)
Van Rinsum and Verbeeten (2012)
Accounting, Organizations and Society (AOS)
Anderson et al. (2002)
Chang, Cheng, and Trotman (2013)
Chapman and Kihn (2009)
Chenhall (2005)
Fayard, Lee, Leitch, and Kettinger (2012)
Hall (2008)
Hall and Smith (2009)
Hartmann and Slapniar (2009)
Naranjo-Gil and Hartmann (2007)
Vandenbosch (1999)
Behavioral Research in Accounting (BRIA)
Chenhall (2004)
Lin and Fan (2011)
Mahama and Cheng (2013)
Miller, Denison, and Matuszewski (2013)
Contemporary Accounting Research (CAR)
Abernethy, Bouwens, and van Lent (2013)
Nicolaou, Sedatole, and Lankton (2011)

J. of Accounting and Economics (JAE)

No article
J. of Accounting Research (JAR)
Bouwens and van Lent (2007)
J. of Management Accounting Research (JMAR)
Bouwens and van Lent (2006)
Chenhall, Kallunki, and Silvola (2011)
Naranjo-Gil and Hartmann (2006)
Management Accounting Research (MAR)
Abernethy, Bouwens, and van Lent (2010)
Burkert and Lueg (2013)
Hall (2011)
Hartmann and Slapniar (2012)
Homburg and Stebel (2009)
Mahama (2006)
Pondeville, Swaen, and De Rong (2013)
The Accounting Review (TAR)
Dowling (2009)
Elbashir, Collier, and Sutton (2011)
Ittner et al. (1997)
The British Accounting Review (BAR)
C. M. Lau and Martin-Sardesai (2012)
Sholihin, Pike, Mangena, and Li (2011)

21

Figure 1. Development of PLS-SEM Studies in Management Accounting Research

22

Table 2. Reasons for Using PLS-SEM in Management Accounting1

N
Percentage
Total Mentioning
33
89.2%
Small Sample Size
29
78.4%
Non-Normal Data Distribution
25
67.6%
Simultaneous Estimation
9
24.3%
Exploratory Objective
8
21.6%
Formative Measurements
6
16.2%
Model Complexity
5
13.5%
Prediction Target
1
2.7%
1
The sum of the percentages exceed 100 percent because multiple reasons mentioned.

23

Table 3. Sampling Characteristics

N
138

Percentage

Ten Times Rule of Thumb not Met

10.8%

Less than the Necessary Sample Size

for Detecting Medium Effect Sizes

15

40.5%

Nonresponse Bias Tested

19

51.4%

Common Method Variance

10.8%

Missing Values Reported

10.8%

Treatment of Outliers

10.8%

Power Analysis

10.8%

Non-Normality Tested

5.4%

Sample Size

24

Table 4. Sample Size for a Statistical Power of 0.80

Number of
Predictors
1
2
3
4
5
6
7
8
9
10

0.02
Significance Level
0.01
0.05
0.10
588
699
779
845
902
953
999
1042
1083
1121

395
485
550
602
647
688
725
759
791
822

311
388
444
489
527
562
594
623
651
677

Effect Size
0.15
Significance Level
0.01
0.05
0.10
82
98
109
114
127
135
142
148
154
160

55
68
77
85
92
98
103
109
114
118

43
54
62
69
75
80
85
90
94
98

0.35
Significance Level
0.01
0.05
0.10
37
45
51
55
59
63
67
70
73
76

25
31
36
40
43
46
49
52
54
57

20
25
29
32
35
38
41
43
45
47

25

Table 5. Model Characteristics

Number of latent variables
Number of inner model path Relations
Outer Model Specification
Only reflective measurements
Only formative measurements
Reflective and formative measurements
Indicators per reflective construct
Indicators per formative construct
Models with single items

N
6.16
11.43

Percentage

29
0
8
3.83
4.44
12

78.9%
0.00%
21.6%

32.4%

26

Formative

Reflective

Table 6. Outer model evaluation

Quality criterion
Indicator reliability
Internal consistency reliability
Convergent validity
Discriminant validity
Indicators absolute contribution
Significance of weights
Multicollinearity

Test criterion
Indicator loadings
Composite reliability
Cronbach's Alpha
Average Variance Explained
Fornell-Larcker criterion
Cross-loadings
Indicator weights
Significance levels
VIF/tolerance

N
28
32
18
31
33
21

Percentage
75.68%
86.49%
48.65%
83.78%
89.19%
56.76%

5
6
5

62.50%
75.00%
62.50%

27

Table 7. Inner model evaluation

Quality criterion/Additional Analyses
Explained variance
Effect size
Predictive relevance
Relative predicted relevance
Path coefficients
Significance of path coefficients
Mediator Analysis
Moderation Analysis
Continuous
Categorical

Test criterion
R2
f2
Cross-validated redundancy Q2
q2
Absolute values
Statistical significance

N
35
3
4
0
37
37
12
9
3
6

Percentage
95.0%
8.1%
10.8%
0.0%
100.0%
100.0%
32.4%
24.3%
8.1%
16.2%

28

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