Management Accounting Research 21 (2010) 2–16

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Management Accounting Research

journal homepage: www.elsevier.com/locate/mar

Leadership and control system design

Margaret A. Abernethy a , Jan Bouwens b,∗ , Laurence van Lent b
a
Faculty of Economics & Commerce, The University of Melbourne, Australia
b
Department of Accounting, Tilburg University, The Netherlands

a r t i c l e i n f o a b s t r a c t

JEL classification: Little attention has been given to the role of leadership characteristics in the organization
M41 design literature despite significant evidence of its importance in explaining firm behavior.
Keywords: This study develops and tests a model to assess the effects of leadership style on three con-
Leadership style trol choices that are considered integral elements of a firm’s management control system;
Empowerment namely the delegation choice, the use of planning and control systems and the perfor-
Communication mance measurement system. Our results, based on data collected from 128 profit center
Execution managers, indicate that leadership style is a significant predictor of senior management’s
Control system use use of the planning and control system and their use of the performance measurement
Organization design system for rewarding lower-level managers. After controlling for operating contextual fac-
tors (namely, subunit interdependencies and knowledge asymmetries) we find no effect of
leadership style on delegation choices but do find that leadership style influences the use
of planning and control systems as predicted.
© 2009 Elsevier Ltd. All rights reserved.

1. Introduction has never abandoned the view that it is the attributes of

The role of leadership and its impact on the organi-
zational design of firms virtually disappeared from the
accounting literature 20 years ago. Management scholars
continue to explore the influence of leadership on firm per-
formance and, more recently, are concerned with ‘when
and under what circumstances leadership might matter
more or less’ (O’Reilly et al., 1988, p. 5; Bass, 1990; Cannella
and Monroe, 1997; Wasserman et al., 2001). Economists
are beginning to recognize the importance of the leader-
ship role in the firm.1 Part of their interest stems from
the desire to explain the considerable amount of hetero-
geneity observed in corporate governance and accounting
practices (Rotemberg and Saloner, 2000; Malmendier and
Tate, 2002; Bertrand and Schoar, 2003). Practice, of course,
∗ Corresponding author at: Tilburg University, Warandelaan, PO Box
90153, 5000 LETilburg, The Netherlands.
E-mail address: j.bouwens@uvt.nl (J. Bouwens).
1
See Bolton et al. (2008) for a recent review of formal models of lead-
ership in economics.
a leader that are key to understanding what goes on in
organizations. Bolton et al. (2008) draw on practice2 to
develop a conceptual framework of leadership and include
five elements of leadership: (1) setting a vision, (2) com-
munication, (3) empowering others, (4) execution and (5)
integrity.
While acknowledging the importance of these key
elements practitioners as well as management scholars
recognize that individuals approach the task of leadership
differently, that is, they adopt different ways of setting
the vision and communicating it to employees; different
approaches to communication; variance in the extent to
which employees are empowered and differences in the
way in which the vision is implemented through mon-
itoring and control choices. The management literature
argues that these differences are explained by the personal-
ity and behavioral traits of managers which is conveniently
2
In particular they refer to the writings and commentary of Richard
Parsons, former CEO of Time Warner and recently appointed Chairman of
Citigroup.

1044-5005/$ – see front matter © 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.mar.2009.10.002
 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
summarized as ‘leadership style’, i.e. the style used to
influence “others to understand and agree about what
needs to be done and how to do it, and the process of
facilitating individual and collective efforts to accomplish
shared objectives” (Yukl, 2005, p. 8). While the manage-
ment research, and more recently the economics literature,
recognize that leadership influences organizational func-
tioning accounting researchers have so far been relatively
silent on how the leadership style influences the design
and use of management control systems. It is clearly likely
to be an important correlated (but often omitted) variable
given that control choices are the means by which top man-
agers communicate, empower and execute their vision.
We address this oversight in the accounting literature and
develop a model to evaluate the effect of leadership style
on control choices. We draw on themes in Bolton et al.’s
(2008) conceptual framework to focus on three control
choices that correlate with the key elements of leadership –
communicating, empowering and executing the vision. We
assess how the planning and control system (PCS) is used
by leaders for communicating to agents within the firm;
the extent to which a leader delegates specific manage-
rial decisions (e.g. decisions relating to human resources;
marketing, internal process, etc.) as a means of empowering
subordinates; and the use of the performance measure-
ment system (PMS) as a means of executing and ensuring
accountability for the goals of the firm. We expect that
the choice in the use and design of these controls will be
influenced by the leadership style of senior management.
Our model enables us to explore how leadership style
influences the way in which a leader communicates,
empowers and executes the vision of the firm. The results,
based on a broad-based sample of profit center managers,
indicate that control choices are determined by leadership
characteristics. After controlling for contextual operating
factors, i.e. interdependencies among profit centers, and
knowledge asymmetry between the profit center manager
and his superior, we find that leadership style significantly
influences top management’s use of planning and control
systems as a communication device within the firm and
their reliance on quantitative performance measures for
compensating and rewarding profit center managers. Con-
trary to our expectations we do not find that leadership
characteristics influence the decision to delegate manage-
rial responsibilities to subordinates within the firm. This
decision is only influenced by the operating context. Con-
sistent with prior literature, we find that increasing levels
of knowledge asymmetry lead to greater delegation and as
interdependencies among profit centers increase top man-
agement will retain decision rights.
The following section provides the theoretical justifica-
tion of the model.
2. Hypotheses development
2.1. Effect of leadership style on control choices
The authority that resides with top management
enables them to define structures, shape strategic priori-
ties, implement formal controls, set targets, and then take
action to correct deviations. However, the authority to
3
direct and control subordinates is only part of the story.
It is also the behavioral tendencies and personal traits
associated with a leader that influence how they use con-
trols to influence the behavior of subordinates (Bass, 1990;
Hunt and Conger, 1999; Waldman and Yammarino, 1999;
Waldman et al., 2001; Yukl, 2005). It is the ability of lead-
ers to articulate and communicate their vision for the firm
as represented by their own values, their role modeling
of those values, their ability to communicate performance
expectations and provide subordinates with the confidence
to achieve those expectations (Roberts, 2004). In other
words, it is the personal relation between the leader and
his/her followers that results in changes in firm behavior.
Much of the management literature defines leadership
in typologies that include at least two categories of leader-
ship style. We select the Stogdill and Coons (1957) typology
for three reasons. First, we want a construct that clearly dis-
tinguishes the interpersonal characteristics of a leader from
control choice decisions that a leader makes. The Stogdill
and Coons typology captures a leader’s general preferences
in relation to their relationship with subordinates without
any reference to how those interpersonal traits are trans-
lated into specific behaviors associated with control system
use. This is in distinct contrast to the strand of research
in the management literature that considers delegation,
information exchange and communication as an expres-
sion of a particular leadership style (Bass and Valenzi, 1974;
Shapira, 1976; Kerr and Jermier, 1978; Graen, 1989) rather
than viewing leadership style as a distinct construct. The
use of the Stogdill and Coons’ (1957) typology enables us
to clearly distinguish leadership style from decisions relat-
ing to delegation and the way in which the planning and
control system and the performance measurement system
are used within the firm. Second, we choose the Stogdill
and Coons (1957) typology given recent support for its
construct validity (Judge et al., 2004). Third, the instru-
ment has been used repeatedly in the accounting literature
(Brownell, 1985; Otley and Pierce, 1995; Moores and Yuen,
2001). Luft and Shields (2003) stress the importance for
empirical research in accounting to operationalize con-
structs using similar instruments to more readily allow
for comparative analysis. The Stogdill and Coons (1957)
typology classifies leadership style into consideration and
initiating structure. Consideration is the degree to which
a leader involves others in decision making, considers
the opinions of subordinates, and shows concern for their
well being. Initiating structure is the degree to which top
management structures the work environment by imple-
menting uniform procedures and by defining roles and
responsibilities.3
It is clear from both the theoretical and empirical liter-
ature that top management can exhibit characteristics of
a consideration and an initiating structure style. They can,
on the one hand, have a high initiating structure that leads
3
The Stogdill and Coons typology is conceptually similar to Waldman et
al.’s transactional/charismatic leadership style. Transactional leadership
maps neatly into the initiating structure style while charismatic and con-
sideration style both capture the interpersonal relation between superiors
and subordinates.
4 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
them to structure their own role and that of their subor-
dinates through the use of procedures and other formal
control mechanisms that provide direction and monitor
the performance of subordinates. They can, at the same
time, have interpersonal leadership traits that lead them
to develop more personal relationships with subordinates
and allows them to informally communicate their prefer-
ences, seek input from subordinates and develop a collegial
and trusting relationship with subordinates (Waldman et
al., 2001; Koene et al., 2002). We expect to observe that
managers can be both considerate and provide structure
or lack either one of these traits. We hypothesize that the
two traits will have quite distinct effects on control choices.
2.1.1. Empowerment of subordinates – the decision to
delegate decision rights
Empowerment of others is an important choice made
by senior management. The degree to which top manage-
ment delegate decision rights to subordinates is an explicit
choice. Delegation is quite distinct from leadership style
as it represents the ‘real authority’ given to subordinates
to make decisions over a range of decisions that affect the
functioning of the business (e.g. HR, process, marketing,
strategic). The degree of delegation varies from very little,
where senior management make all of the major deci-
sions to full delegation where subordinate managers are
given the full set of decision rights (i.e. does not need to
seek approval from a superior) such as sometimes asso-
ciated with investment or profit centers (Bouwens and
van Lent, 2007). We know from prior research that the
operating context of the firm influences the delegation
decision. Empirical evidence indicates that interdependen-
cies among subunits within the firm influence the choice
to delegate decision rights (Bushman et al., 1995; Keating,
1997; Abernethy et al., 2004) as does the knowledge asym-
metry between senior managers and subordinates (Gordon
and Narayanan, 1984; Baiman et al., 1995; Nagar, 2002;
Christie et al., 2003; Abernethy et al., 2004).
What we do not know is whether leadership style will
influence this choice or whether it is entirely determined
by the operating context. There is some support that lead-
ership style will partly explain the extent of delegation. The
findings from the Ashour and England (1972) study suggest
that the degree of delegation (operationalized as discre-
tionary and non-discretionary decisions) differs dependent
on whether leaders are high in dominance or low in dom-
inance. Similarly, Leana (1986) argues that managers who
view their roles primarily as providing direction to subordi-
nates (high in dominance) will delegate less than managers
who view developing subordinates (low in dominance) as
important to their role. These two different perceptions of
leadership roles are very similar to the initiating structure
role and the consideration role.
Leadership style captures cognitive or personality char-
acteristics of managers. Based on prior literature we
expect these characteristics will manifest themselves in
the leader’s preference for empowerment of subordinates.
Leaders high on initiating structure are much more struc-
tured in their approach to leadership. They prefer to define
roles unambiguously, define specific tasks and rely on the
use of standardized rules and procedures to direct the
behavior of subordinates and monitor adherence to stan-
dards. If this is top management’s preferred leadership
style it is likely that the choice to delegate decision rights
will reflect this preference. Empowerment for this type of
leader will be through delegation for specific tasks or a pre-
specified set of targets but decision rights will be bounded
within those targets – subordinates will not have the auton-
omy to make decisions without referring to the superior.
This is in contrast to a consideration leadership style.
This style is characterized by not only a leader concerned
with the welfare of subordinates but also one who desires
to have subordinates involved in the decision making of
the firm. Involvement in decision making cannot occur
effectively unless subordinates perceive they have ‘real
authority’ and autonomy to make decisions over their own
areas of responsibility. In other words, subordinates are
empowered to make decisions at the local level and are not
bounded tightly by structured roles and responsibilities.
What is important in considering the relationship between
leadership style and empowerment is that the delegation
decision and leadership style be internally consistent or
cognitive dissonance will emerge.4 To minimize cognitive
dissonance we would expect to observe leaders high on
initiating structure preferring low levels of decision rights
delegation and those high on the consideration dimension
preferring high levels of subordinate autonomy.
While the relationship between leadership style and
the delegation choice is intuitively appealing, it is not
clear whether the cognitive dissonance created by a mis-
match between leadership style and delegation choices
will add additional variance to the delegation choice given
the significance of the operating context on this choice.
Prior literature provides convincing evidence that oper-
ating context is the primary determinant of delegation
(Nagar, 2002; Christie et al., 2003; Abernethy et al., 2004). If
this is the case it is possible to observe no relation between
leadership style and delegation choice. We test this ‘two-
horse’ race by controlling for the operating context in the
model. Given the uncertainty a priori as to the importance
of leadership style vis-à-vis operating context we state our
hypothesis in the null.
H1. There is no relation between leadership style and level
of delegation of decision rights to subordinate managers.
2.1.2. Communicating – interactive use of planning and
control systems (PCS)
The way in which leaders communicate is an inte-
gral part of their leadership style (Bolton et al., 2008).
Leaders must be able to communicate their vision as
well as articulate the way in which that vision is trans-
lated into operational goals and objectives. Planning and
control systems (PCSs) are used in most large firms
(Merchant and Van der Stede, 2007) to communicate a
4
Research in the late 1970s and early 1980s studied the relation
between formalization and centralization (Grinyer and Yasai-Ardekani,
1980). This study is concerned with the cognitive characteristics of a
leader as displayed by their leadership style and how these character-
istics manifest themselves in delegation choice; not the relation between
formalization and delegation choice per se.
 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
firm’s goals and objectives through the firm. Scherr and
Jensen (2006) provide a model of leadership that makes
explicit the importance of implementing control systems
to achieving the vision of top management – “great leader-
ship requires effective systems that create and publicize
breakdowns. . .”. These systems not only communicate
what is important but also identify “breakdowns” or vari-
ances that can then be resolved in order to achieve the
vision. Prior research in accounting tends to focus on the
relative importance of PCSs rather than difference in the
use of the systems by senior management within firms. This
study examines how PCSs are used by senior management
to communicate what is important for the firm drawing on
descriptions of PCS use provided by Burchell et al. (1980)
and later Simons (1990). While both studies were examin-
ing PCSs from different theoretical perspectives there are
similarities in the way they described managers’ use of
PCSs.5 For simplicity, we can think of PCS being used for
communication along a continuum where at one end PCS
are used in a relatively didactic format where targets are
specified and performance is measured against these tar-
gets. At the other end, PCSs are used as a mechanism to
facilitate greater informal and interpersonal communica-
tion between top management and lower-level managers
and/or among the lower-level managers. The former use
would be a relatively standardized formal process – what
Burchell et al. (1980) would refer to as an “answer machine”
and what Simons (1990) describes as diagnostic use. The
latter would be a more interactive process that facilitates
ongoing communication between top management and
lower-level managers. Simons’ refers to this as ‘interactive
use’ and Burchell et al. (1980) classifies this as a ‘dialogue
or idea creation’ machine.
We are interested in the interactive communicative
use of PCS. The use of PCS for interactive communica-
tion encourages lower managers to be involved in the
setting of targets and to provide input into the budget. It
allows top management to reveal their priorities on par-
ticular targets, and it facilitates debate among the levels
of management on how best to achieve targets. If the
system has been designed as an interactive communica-
tion tool it is likely that it will be used for this purpose
both vertically within the firm (i.e. between top manage-
ment and profit center managers); horizontally within the
firm (between profit center managers) and also within
the individual budget units. We expect that the degree
to which the PCS is used for interactive communication
will be influenced by leadership style. While we expect
that the direction of the relation between both leader-
ship style and interactive use to be positive we expect
that the relation will be more positive for the consider-
ation style of leadership than for the initiating structure
leadership style. The consideration leadership style cap-
5
Burchell et al. (1980) were interested in a normative model of account-
ing use to explain differences in what theoretically would be expected
based on the operating context and what was actually observed. Simons
(1990, 1991) wanted to explain why the use of a particular element of a
firm’s control system would differ depending on the strategic uncertain-
ties faced by the firm. Our study focuses more broadly on the use of PCS
for communication and what determines that use.
5
tures top management’s preferences for an interpersonal
style of management. A manager high on consideration is
one who will positively seek to communicate and interact
with subordinates. When used as an interactive commu-
nication tool, the PCS provides the means for leaders to
communicate their visions and expectations and to seek
input from subordinates (Simons, 1991; Abernethy and
Brownell, 1999). They will use the PCS to communicate
informally their strategic priorities and expectations as to
what subordinates should achieve and how best to achieve
those priorities. If the system encourages vertical commu-
nication it will also encourage horizontal communication
among peers as they seek to use the system for debating
alternative means of achieving strategic priorities.
Brownell (1981), drawing on cognitive behavioral the-
ory, argues for congruence between personality variables
and the conditions of control inherent in a particular sit-
uation. In this study, we expect congruence to be high
between the personal traits associated with a considera-
tion leadership style and communicative use of PCSs, that
is, we expect a significant and positive relation. We do
not expect to observe a negative relation between initi-
ating structure and interactive use of PCS. Given Scherr
and Jensen’s (2006) argument that strong leadership will
always be accompanied with systems that direct and mon-
itor achievement of objectives, we expect that initiating
structure will also be positively related to interactive use
but in a more limited way. A manager with initiating struc-
ture leadership traits would use the PCS to communicate
but it would likely be much more hierarchical and a more
structured form of communication. Input from subordi-
nates would be more formal, standardized and routine. For
example, subordinates might be given the opportunity to
provide information concerning variances through a formal
reporting process. Overall we do not expect that interac-
tive communicative use of the PCS would be as intensive
as what we expect to observe with managers high on the
consideration leadership traits. Our expectations can be
summarized as follows:
H2a. The relation between leadership styles and use of
the planning and control system as an interactive commu-
nication device will be positive.
H2b. The relation between consideration style of lead-
ership and planning and control systems will be more
positive than the relation with initiating structure style of
leadership.
2.1.3. Executing the vision – use of performance
measurement systems (PMS) for accountability
The third dimension of leadership is the way in which
senior management execute the vision. There are numer-
ous ways in which leaders can execute their vision and
achieve accountability. Performance measurement sys-
tems (PMS) are one form of accountability used by
top management to monitor behavior and to evalu-
ate performance. These systems specify desired behavior
in the form of targets and then measure performance
against these targets. Performance measurement systems
influence behavior because they form the basis for com-
pensation and promotion decisions within the firm. The
6 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
extent to which this type of accountability mechanism is
used will depend on the leadership style exhibited by top
management. However, we only expect this relationship
to hold for the initiating structure dimension of leadership.
Top management, high on the initiating structure dimen-
sion, have a preference for formal structures and processes
(Waldman et al., 2001). The use of performance measures
for compensation and promotion of lower-level managers
requires a reliance on the formal setting of performance
targets, measurement of performance against these targets
and a compensation system that computes bonuses based
on these formally determined performance targets. Con-
trolling subunit managerial behavior based on this form
of control is consistent with an initiating structure leader-
ship style (Brownell, 1985). We thus expect to observe a
positive relation between initiating structure and the use
of the PMS. As the consideration style is associated with
strong informal interpersonal relations between superiors
and subordinates we do not expect that this leadership
dimension will influence the use of PMS. Our expectations
can be summarized as follows:
H3a. There is a positive relation between initiating
structure leadership style and use of the performance mea-
surement system.
H3b. There is no relation between consideration lead-
ership style and use of the performance measurement
system.
2.2. Relations among control choices
Several recent papers empirically examine whether
control choices are made simultaneously (Nagar, 2002;
Abernethy et al., 2004). These empirical studies, based on
the economics design literature, support other evidence
gathered in the field that delegation choices are made
first followed by other management accounting choices
(Abernethy and Lillis, 1995). We thus follow prior empir-
ical findings and predict that delegation choices will be
an important determinant of the interactive use of PCS
and the use of performance measures for determining
compensation and/or promotion. Our arguments for these
expectations are as follows.6
Much of the literature on control system choices
makes a simplifying assumption that delegation of decision
rights is necessary where there is information asymmetry
between superiors and subordinates. To improve decision
making, top management have to delegate to lower-level
managers who have private information. This view usu-
ally derives from basic agency models in which the firm
responds to the moral hazard problem created by the del-
egation of decision making power to more knowledgeable
agents by implementing performance measurement and
6
We undertook additional analysis (not reported here) to ensure that
this was not an unreasonable expectation. Specifically, we estimated a
non-recursive model in which the interactive communication use of PCS
and PMS were allowed to feedback to decentralization. Identification of
the model required that we made some restrictions about which relations
were admitted. The results are consistent with the idea that management
accounting control choices follow decentralization choices.
reward systems which links agents’ actions to the outcome
of their decisions. Delegation then is a substitute for top
management trying to acquire information and for involv-
ing subordinates in decision making.
In contrast, we consider PCSs to provide a complement
to the delegation choice as they have the potential to
address some of the information asymmetry that exists
between superiors and subordinates. Even when decision
making is delegated, top management is likely to have
private information they need to pass on to lower-level
managers. Interactive use provides a means to communi-
cate a common mental model of the business or helps to
establish common values which will guide subordinates in
making congruent decisions. The use of the PCS as an inter-
active communication device allows top management to
reveal their preferences to subordinates, encourage sharing
of information between top management and lower-level
managers and allow managers to debate the underlying
assumptions associated with targets and objectives that
underlie the PCS (Simons, 1990, 1991; Abernethy and
Brownell, 1999; Garicano, 2000). Davila (2000) and Bisbe
and Otley (2004) argue that PCS can be used effectively
to fill an ‘information gap’ and provide some evidence of
the circumstances in which this will occur. We argue that
this is likely to occur when decision rights are delegated. In
other words, the PCS are used as a complement rather than
a substitute of the delegation choice.
If lower-level managers have little autonomy in the
operation of their unit there is less benefit in interacting
with top management. The ‘information gap’ is less and
thus top management will not need to expend resources
communicating strategic priorities using the PCS for inter-
active communication. If the authority for decision making
resides with the top management, it will be more efficient
for top management to use hierarchical systems to direct
behavior of subordinates. It is expected that a more formal
or diagnostic use of the PCS will occur when few decision
rights are delegated. Our expectation concerning delega-
tion and the communicative use of PCSs can be summarized
as follows:
H4. There is a positive relation between the level of dele-
gation and interactive communication use of PCSs
Based on prior empirical evidence we also expect dele-
gation choice to be positively associated with the use of
PMS for measuring and rewarding performance (Nagar,
2002; Abernethy et al., 2004). As argued above, delegation
of decision rights creates the potential for moral hazard
problems to emerge. One way for top management to
respond is by implementing PMS to encourage goal congru-
ence. This system forms part of the formal incentive-based
contracting process with subordinates. Desired perfor-
mance is specified in quantitative targets (often in the
form of accounting metrics); performance is evaluated
based on these targets and rewarded in the form of com-
pensation and/or promotion. In contrast, when decision
making is centralized fewer control loss problems occur,
as decision rights have not been delegated. Top manage-
ment is less likely to rely on performance measurement
linked to rewards but rely instead on less costly monitoring
devices to control the behavior or actions of subordinates
 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
Table 1
Predictive effects investigated in this study.
Path from Path to
Delegation
Endogenous
Delegation
Test variables
Leadership style of consideration ?(H1)
Leadership style of initiating structure ?(H1)
?=no association is predicted.
(e.g. supervision, procedures, rules). While this study does
not examine these alternative monitoring devices prior
research indicates that supervision and standard operat-
ing procedures are less effective in decentralized settings
simply because top management lacks the required knowl-
edge about what needs to be done to pre-specify actions
or regulate behavior through rules and procedures (Bruns
and Waterhouse, 1975; Merchant, 1985; Abernethy and
Brownell, 1997). Our expectation is summarized as follows:
H5. There is a positive relation between level of delega-
tion and use of performance measurement systems.
2.3. Control variables
We control for two operating contextual factors, namely
subunit interdependencies and knowledge asymmetry, in
the model used to test our hypotheses.
2.3.1. Summary of hypotheses
Table 1 summarizes the hypotheses to be tested.
3. Research method
3.1. Sample selection
We require a sample that enables us to assess the lead-
ership style of top management and the control choices
made by those managers. We collect questionnaire data
from profit center managers from a cross section of firms in
the service and manufacturing sectors of the Netherlands.
These managers report to the CEO of the firm and are con-
sidered to be the most appropriate respondent to reflect
on leadership style and control system choice of top man-
agement. The managers are selected as follows. We first
identify a sample of service and manufacturing firms that
reflect the regional distribution of firms throughout the
Netherlands and is consistent with the ratio of service and
manufacturing firms in the Netherlands. These firms were
then contacted and asked to participate. Each firm is visited
to ensure that they are of the required size and have a profit
center structure. We only include firms that have at least
three profit centers of a reasonable size (i.e. greater than
100 employees). We require firms to be sufficiently large to
warrant the implementation of formal management con-
trol systems. It is important that the systems in place can be
used for performance measurement and for planning and
control. We interview one randomly selected profit cen-
7
Interactive communication Use of performance
use of planning and measurement systems
controls systems (PCS) (PMS)
+(H4) +(H5)
++(H2a and H2b) ?(H3b)
+(H2a and H2b) +(H3)
ter manager in each firm. In addition to visiting each of
the firms we offer to provide a performance measurement
seminar to all respondents. This method of obtaining par-
ticipation results in an excellent response rate. Of the 170
firms contacted, more than 75% agree to participate. This
results in a sample of 128 profit centers.
Our respondents have on average 5.15 years of expe-
rience (median = 3.00) in their profit center and are on
average 42 years of age (median = 42). They held their cur-
rent position for an average of 3.2 years (median = 2.00).
The mean experience of the profit center manager is 1.0
year shorter than that of top management (median = 0);
the difference in experience between respondent and
his superior in the industry is on average −0.26 years
(median = −1.0). The mean profit center employs 208
people (in full time equivalents) (median = 93.5). These
descriptive statistics are consistent with respondents occu-
pying the hierarchical position we intended to address –
managers with profit center responsibility reporting to the
CEO of the firm. A breakdown of the sample by industry
and size is provided in Appendix A.
3.2. Variable measurement
We use five main constructs in our empirical model as
well as two context control variables. We measure each of
these constructs using seven-point Likert-type scales. We
assess the composite reliability of each of the constructs
with the composite reliability index proposed by Fornell
and Larcker (1981). This index is analogous to Cronbach’s
alpha and reflects the internal consistency of the indicators
measuring a given construct. We also compute estimates of
the variance extracted (again following Fornell and Larcker,
1981). This statistic measures the amount of variance that is
captured by an underlying factor in relation to the amount
of variance due to measurement error. Estimates of 0.50
or larger are desirable, albeit that lower values are accept-
able in fields of inquiry that are still not well understood.
We use this statistic to assess discriminant validity of our
constructs. For any two constructs, the square root of the
variance extracted should be greater than the simple cor-
relation between these constructs.
Where possible we use alternative measures to assess
the convergent validity of our variables. Convergent
validity exists if the correlation between construct and
alternative measure is positive and significant. Compos-
ite reliabilities of our constructs are good; the index varies
8 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
Table 2
Pearson correlations between latent variables based on 128 observations. Data obtained from a survey of profit center managers. Diagonal entries are the
square root of the average variance extracted. The column ‘Composite reliability’ reports a measure of internal consistency as described in Fornell and
Larcker (1981).
Composite reliability
1. Delegation 0.82
2. Interactive communication use of 0.81
planning and control systems
3. Performance measurement system 0.80
4. Leadership style of consideration 0.82
5. Leadership style of initiating structure 0.79
6. Knowledge asymmetry 0.81
7. Interdependencies 0.91
The square root of the average variance extracted is used to evaluate the discriminant validity of the latent variables. Discriminant validity is said to exist
if the diagonal entries are greater than the corresponding off diagonal entries (Fornell and Larcker, 1981).
*
10% significance level (two tailed).
**
5% significance level (two tailed).
***
1% significance level (two tailed).
between 0.79 (leadership style of initiating structure) and
0.913 (interdependencies). The average variance extracted
is generally above 0.50 although three constructs are some-
what below which indicates that these are subject to
some measurement error. This analysis supports the use
of a latent variable estimation method (see below) which
mitigates the inconsistency in parameter estimates from
individual variables with measurement error (consistent
with the recommendation in Ittner and Larcker, 2001).
Notwithstanding the measurement error in some of the
constructs, discriminant validity is established in all cases.7
We discuss the measurement of all variables below. Table 2
provides reliability statistics and the simple correlations
between the constructs. Survey items are reproduced in
Appendix B.8
3.2.1. Delegation choice
The extent to which top management delegate deci-
sion rights is viewed as a design control choice. We use
an instrument that captures, in a relatively objective man-
ner, whether decision authority resides with the superior
or the subordinate. We use the instrument developed by
Abernethy et al. (2004) and ask respondents to indicate
their decision making authority relative to their superior on
five dimensions: strategy, investments, marketing, inter-
nal processes and human resources. This is consistent with
the approach used by others (Khandwalla, 1977; Gordon
7
The questionnaire items of the “leadership style” and “use of control
systems” instruments (discussed below) have similar phrases on some
occasion. For example, we measure leadership with “lets managers know
what is expected of them” whereas the use of PMS instrument includes the
question “to what extent does your superior use performance measures”.
Note, however, that the leadership questions ask about personality traits
of the leader without referring to the leader’s use of control systems. Our
control system questions, on the other hand, ask explicitly how control
systems are used in the relation between leader and subordinate without
referring to the personality of the leader. Thus, the constructs are clearly
distinct in their measurement. This is also borne out by the statistical
evidence based on both formal discriminant validity tests based on AVE
in Table 2 and a clean factor loading in Table 3.
8
The appendix also reports Cronbach’s alpha statistics for each of the
latent constructs, which we provide for illustrative purposes only. Our
evaluation of the psychometric properties of our constructs is based on
the partial least squares measurement model as discussed below.
1 2 3 4 5 6 7
0.73 \
0.18** 0.72
0.07 −0.36*** 0.82
−0.05 0.40*** 0.09 0.66
−0.06 0.31*** 0.42*** 0.25*** 0.64
0.35*** 0.15* 0.10 −0.04 0.06 0.68
−0.22** −0.12 −0.11 0.02 −0.04 −0.22** 0 .92
and Narayanan, 1984; Nagar, 2002; Bouwens and van Lent,
2007). The lower end of the scale is anchored by “my profit
center has all authority” while the upper end of the scale
is anchored by “my superior has all authority”. After eval-
uating the measurement properties of this instrument we
dropped one item (on investments).9 Each item is reverse
coded such that larger values of the construct represent
higher levels of delegation.
3.2.2. Interactive communication use of PCS
We use the instrument developed by Abernethy and
Brownell (1999) and adopted by others (Bisbe and Otley,
2004) to measure the use of the PCS. Abernethy and
Brownell (1999) developed the instrument to capture
Simons (1990)10 notion of interactive use. While Simons’
study was not explicitly about the use of PCS for commu-
nication within the firm it is implicit from his descriptions
of interactive and diagnostic use. The items in Abernethy
and Brownell (1999) instrument relate to the way in which
the PCS is used for communication within the firm and
thus appropriate for assessing the extent to which PCS are
used as an interactive communication device. The origi-
nal instrument consisted of four items and was used in the
context of hospitals. We rephrase the original items to bet-
ter fit our broad-based sample. We ask respondents their
view on the way in which the PCS is used within their firm.
The instrument includes questions that relate to use that
involves the CEO and the profit center manager as well as
its use among managers within the firm. We follow Aber-
nethy and Brownell’s example to validate the instrument
by asking respondents – earlier in the questionnaire – to
choose which of two descriptions of the use of planning
9
The delegation instrument was used in prior literature at the divisional
level. In contrast, our sample includes profit center managers which do
not typically have decision making power over investments (see Anthony
and Govindarajan, 2004).
10
Note that Simons (1990) research examined the way different ele-
ments of a firm’s control system was different dependent on the level of
strategic uncertainty. In some circumstances the budget could be used
interactively and in other circumstances it could be used diagnostically.
Underpinning Simons’ construct is the notion of communication as he was
interested in how the system allowed senior management to ‘reveal their
preferences’ and to encourage debate among subordinates.
 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
and control systems best fits the way in which the system
is used. These two descriptions, again following Abernethy
and Brownell, are based directly on Simons’ (1991, 1995).
One description represents interactive communication use,
the other a more formal diagnostic style. This method of
construct validation (i.e. using two forms of measurement)
is supported in the literature. The correlation between the
forced choice of two alternative descriptions of planning
and control system use and our construct of interactive
communication use of PCS is 0.35 (p < 0.001), which pro-
vides further assurance as to the validity of our construct.
We recoded the answers in such fashion that higher scores
represent a higher interactive use of the PCS.
3.2.3. Performance measurement system (PMS)
We use a purpose-developed instrument to capture
this construct. We are interested in top management’s
use of performance measures in determining compen-
sation and/or promoting profit center managers. Prior
literature either measures the relative importance of per-
formance measures in evaluating managerial performance
(e.g. Lambert and Larcker, 1987) or the weights placed on
different types of performance measures in compensation
incentive contracts (Ittner et al., 1997). These instruments
focus on the design of the compensation system rather than
whether it is used for evaluating and rewarding managerial
performance. We use a three-item measure to capture the
extent to which top management use performance mea-
sures in determining the compensation and/or promotion
prospects of profit center managers. The instrument is pilot
tested prior to its use. The instrument requires respondents
to indicate on a seven-point Likert scale, anchored at the
poles by “not at all” and “to a large extent”, the degree
to which their superior makes compensation/promotion
decisions (1) conditional on achieving predetermined tar-
gets, (2) based on performance measures that are taken
at face value and (3) based on accounting numbers. The
second item is dropped, however, after evaluating the mea-
surement properties of the instrument. The item does not
load together with the other two items in the cross-loading
matrix and the measurement model indicates that it should
be removed. In hindsight it is obvious that the second item
is capturing a different construct to the one of interest
in this study. Answers are coded such that high scores
represent an intensive use of performance measures in
determining compensation/promotion decisions.
3.2.4. Leadership style
We use an adapted version of the leadership style
instrument (LBDQ) developed by Stogdill and Coons (1957)
(see also, Halpin, 1957). This instrument is used repeatedly
in the literature to capture two dimensions of leadership
style: (1) consideration and (2) initiating structure. The
continued validity of the LBDQ instrument has recently
been demonstrated (Judge et al., 2004). Some of the items
in the original instrument are eliminated due to poor reli-
ability or validity scores. A two-factor structure emerged
after removal of these items. The items in these two fac-
tors capture the essence of the initiating structure and
consideration style constructs of leadership and are gener-
9
ally consistent with the items used in earlier studies.11 The
items are coded such that high values represent a strong
presence of the leadership style with which they are asso-
ciated.
3.2.5. Operating context variables
We measure knowledge asymmetry based on the
instrument developed originally by Dunk (1993) and the
tests of its convergent validity are good.12 We use Keating’s
(1997) two-item instrument to measure interdependen-
cies. In this instrument one question asks respondents to
identify the extent to which their activities impact on other
profit centers’ activities and the other question asks the
extent to which their performance is affected by the activ-
ities carried out by other profit centers. The convergent
validity of this construct is more than satisfactory.
3.3. Model estimation
We estimate our path model using partial least squares
(PLS). In PLS the measurement model (relating the latent
constructs and their observed indicators) and the struc-
tural model (which specifies the relations between latent
constructs) are estimated together. To achieve this, the
measurement and structural parameters of the path model
are estimated in an iterative fashion using simple and
multiple ordinary least squares regressions (Barclay et al.,
1995). PLS avoids assumptions that observations follow
a specific distribution (e.g. multivariate normal) and that
they are independently distributed. As such, PLS is particu-
larly useful as an estimation method for small samples and
where specific distributional requirements are less appro-
priate (Chin and Newsted, 1999). Because the variables
are standardized, the structural equation parameters are
standardized regression coefficients and the measurement
model parameters are correlations between the latent
variable and its observed indicators.13 We provide mea-
surement model details in Table 3. Bootstrapping is used
to evaluate the statistical significance of the path coeffi-
cients. Specifically, we generate 1000 random samples of
128 observations (with replacement) and use the result-
ing empirical distribution of the parameter estimates to
compute bootstrap t-statistics and standard errors.
One of the challenges in testing a model of control sys-
tem choices is the endogeneity problem (Ittner and Larcker,
2001; Luft and Shields, 2003; Larcker and Rusticus, 2004).
As with most empirical research examining control choices,
11
However, two items that belong to the “initiating structure” scale
loaded in contrast on the “consideration” factor (Tries out his/her new
ideas in the group and Makes his/her attitudes clear to the group). We
follow the outcome of the factor analysis and use these questions as
indicators for consideration style. Our results, however, do not change
significantly if we remove these indicators from the analysis.
12
The method and results associated with the convergent validity tests
for subunit interdependencies and knowledge asymmetry are available
from the authors.
13
To provide further assurance with regard to the psychometric prop-
erties of our constructs, we also conduct an explanatory factor analysis in
which we include all indicators for all constructs. We obtain a ‘clean’ struc-
ture for the factor loadings that corresponds with the way the indicators
are assigned to the latent variables in the PLS estimation.
10 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16

Table 3
Measurement model results for all latent variables and cross-loading matrix.

Latent variable Standardized loading 1 2 3 4 5 6 7

Delegation
D-1 0.63*** 0.63 0.22 0.04 0.08 −0.00 0.26 −0.14
D-2 0.83*** 0.84 0.14 0.02 0.04 −0.01 0.32 −0.14
D-3 0.77*** 0.77 0.14 0.11 −0.10 −0.05 0.25 −0.17
D-4 0.68*** 0.68 −0.03 0.04 −0.22 −0.16 0.17 −0.19

Interactive communication use of planning and control systems

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

Performance measurement system

PMS-1 0.88*** 0.01 0.32 0.88 0.06 0.40 0.08 −0.09
PMS-2 0.75*** 0.13 0.27 0.75 0.10 0.26 0.08 −0.09

Leadership style of consideration

LSC-1 0.76*** −0.02 0.32 −0.02 0.76 0.08 −0.14 0.04
LSC-2 0.69*** 0.02 0.19 0.04 0.69 0.25 0.01 −0.04
LSC-3 0.67*** −0.01 0.34 0.12 0.67 0.09 0.03 −0.07
LSC-4 0.49*** 0.04 0.10 0.02 0.49 0.07 −0.01 0.14
LSC-5 0.74*** −0.10 0.31 0.17 0.74 0.33 0.04 0.00
LSC-6 0.59*** −0.06 0.20 0.06 0.59 0.12 −0.12 0.14

Leadership style of initiating structure

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

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

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

Notes: Full descriptions and descriptive statistics of the observable indicators of each latent variable are provided in Appendix B. Standardized loadings are
correlations between the observable indicators and their associated latent variable. Estimates of 0.70 or more are desirable although in causal modeling
lower values are acceptable (Barclay et al., 1995). Denotes significance at the 1% level. Significance levels are based on t-statistics from a bootstrapping
procedure (1000 samples with replacement). The matrix of cross loadings is the component structure matrix that shows how much each observable
indicator loads on another construct than it does on the construct it intends to measure. As such it is used to assess the discriminant validity of the model.
Cross loadings between the observable indicators and their associated latent construct are in bold typeface.
***
significance at the 1% level.

most constructs in this study are inter-related and, at some
level in the firm, all constructs are choice variables. Nev-
ertheless, the design of our study enables us to abstract
from some of the detrimental effects of endogeneity. We
use a causal model that includes two separate stages. The
first relates to the delegation choice made in response to
the two operating constraints and leadership style. These
constraints are assumed to be exogenous – they are the
circumstances that face the firm as a result of market con-
ditions and/or technology. We argue that top management
respond to these constraints combined with the person-
ality traits associated with leadership styles through their
decisions to delegate decision making to lower-level man-
agers (in our study profit center managers). Once this
delegation choice has been made, the second stage relates
to the top management choices that make this organiza-
tional design work (Abernethy and Lillis, 1995; Abernethy
et al., 2004; Roberts, 2004). According to Roberts (2004)
structural design choices are more slow moving and can be
considered as relatively fixed once implemented (Van Lent,
2007). In contrast, the use of the control system is much
more malleable and subject to managerial discretion by
managers. In sum, both structural decisions and operating
constraints can reasonably be considered predetermined
and a fully recursive model can be estimated. As reported
in footnote 5 5, we conducted some additional analysis to
confirm that our reasoning is consistent with the data.
4. Results
4.1. Correlation results
Table 2 reports on the Pearson correlations between the
constructs in this study. We are interested in the correla-
tions between the leadership style constructs and the three
control choices as well as the inter-relations among the
 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
Table 4
Partial least squares regressions. Results of partial least squares analysis of a path model based on 128 observations. Data obtained from a survey of profit
center managers. t-Statistics in parentheses are based on bootstrapping (1000 samples with replacement).
Path from Predicted sign Path to
Delegation
(multiple R2 = 0.15)
Endogenous
Delegation NR, +, +
Test variables
Leadership style of consideration +, +, NR −0.01 (0.12)
Leadership style of initiating structure −, +, + −0.09 (1.05)
Knowledge asymmetry +, NR, NR 0.32*** (3.72)
Interdependencies −, NR, NR −0.15† (1.57)
NR = no relation was hypothesized within the model. Reported coefficients are standardized structural coefficients.
†
15% significance level (two tailed).
*
10% significance level (two tailed).
**
5% significance level (two tailed).
***
1% significance level (two tailed).
control choices. The leadership styles of initiating structure
and consideration are both strongly, positively associated
with the interactive communication use of PCSs (r = 0.31,
p < 0.01 and r = 0.40, p < 0.01, respectively). We also find that
initiating structure is positively associated with the use of
PMS (r = 0.42, p < 0.01), whereas a considerate style does
not impact on the use of PMS. We do not find any evidence
that leadership style affects the delegation choice. Delega-
tion, however, is positively associated with the interactive
communication use of PCS (r = 0.18, p < 0.05) but there is no
relation with PMS (r = −0.07, p > 0.10).
The two contextual variables included in our model
as control variables are significantly correlated with the
decision to empower subordinates through delegation of
decision rights. Knowledge asymmetries are associated
with more delegated decision rights (r = 0.35, p < 0.01) and
positively associated with greater interactive use of the PCS
for communication, albeit at the 10% level (r = 0.15). There
is a negative relation between subunit interdependencies
and delegation (r = −0.22, p < 0.05) and no relation with the
two remaining control choices.
While there are some instances of significant cor-
relations between the independent variables, those
correlations are not sufficiently large to raise concerns
about multicollinearity (Griffiths et al., 1993).
4.2. Main findings
Our findings are presented in Table 4.14 Our model
allowed us to test whether leadership style matters in the
decision to empower subordinates through delegation of
decision rights. We know from prior literature that the
operating context is a significant predictor of delegation
14
We undertake several robustness checks to determine if our results
are influenced by the measurement of the two management accounting
system variables (PCSs and PMS). We test each item of the PMS instru-
ment separately in the model. We also exclude one of the items in the PCS
instrument that does not include reference to the superior/subordinate
relationship and test the model with the three item scale. In all cases the
results are not substantively different from those presented here (details
of these analysis are available from the authors).
11
Interactive communication Performance
use of planning and control measurement system
systems (multiple R2 = 0.26) (multiple R2 = 0.19)
0.17* (1.69) 0.07 (0.68)
0.36*** (4.77) 0.00 (0.04)
0.23*** (2.59) 0.42*** (4.36)
0.07 (0.85) 0.03 (0.30)
0.06 (0.68) −0.07 (0.70)
and our results support prior findings. Knowledge asym-
metries are positively associated with delegation choices
(0.32, t = 3.72) and interdependencies are negatively,
but weakly, associated with delegation choices (−0.15,
t = 1.57). Once we control for operating context, however,
leadership style had no further predictive power on deci-
sion right delegation. Neither leadership style affects a
leader’s preferences for empowering subordinates.15 We
also find support for Hypothesis 2. We expected that a
considerate leader would interactively use the planning
and control system as a communicative device. Indeed, the
coefficient on the path from the considerate style to the
interactive communication use of PCS is significant and
positive (coefficient = 0.36, t = 4.77). We also find that ini-
tiating structure style is associated with the interactive
communication use of the PCS (coefficient = 0.23, t = 2.59)
although as expected under Hypothesis 2b the relation is
less positive than the relation between PCS and considera-
tion leadership style. Using a t-test, we determine if these
coefficients are significantly different from each other as
opposed to being significantly different from zero. We
find a significant difference (t = 3.08, p < 0.01). Hypothesis
3a and 3b are also supported. Leaders who score high
15
It is possible that our setting is not powerful enough to reject the null
hypothesis of no association between leadership style and delegation. We
investigate this possibility by conducting two analyses. We first compute
the power of the test of H1 under the assumption that the delegation
equation is a regular OLS regression (i.e., we ignore that the variables are
in fact latent constructs). Using a critical significance level (˛) of 5% (two-
tailed), we can detect a true effect size of 0.07 with about 80% power.
We consider this the upper bound of the power of the test of H1. Sec-
ond, we conduct a proactive Monte Carlo simulation of power (following
Marcoulides and Sauders, 2006), which takes into account the psychome-
tric properties of our latent variables. We use as hypothesized values for
the model parameters the estimated factor loadings and error variances
from the PLS measurement model. Our aim was to see, given our sample
size of 128, how large the correlation between leadership style and del-
egation in the population has to be in order to detect it with 80% power.
The outcome of this analysis (based on 1000 replications) is that the true
correlation should be at least 0.30. We consider this the lower bound on
the power of the test of H1. Taken these analyses together, we believe that
we can plausibly detect true correlations of about 0.2. Thus, we conclude
that we do not fail to reject the null because of a lack of power.
12 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
on the initiating structure dimension (Hypothesis 3a) use
performance measures more in promotion/compensation
decisions (coefficient = 0.42, t = 4.36) and we find no rela-
tion between considerate leadership style and the use of
performance measures in promotion/compensation deci-
sions (Hypothesis 3b). We also find evidence to support
Hypothesis 4, namely that the delegation choice affects
the interactive communication use of PCS. The path coef-
ficient between these constructs is 0.17 (t = 1.69). Contrary
to what we expect (Hypothesis 5), the delegation choice
does not seem to affect the use of performance measures
for promotion/compensation decisions (coefficient = 0.07,
t = 0.68).
The explanatory power of the model is comparable to
that reported in other organization design studies (Baiman
et al., 1995; Bushman et al., 1995; Keating, 1997; Nagar,
2002; Christie et al., 2003; Abernethy et al., 2004). Our
model explains about 15% of the variance in the delega-
tion construct, 26% in the interactive use of planning and
control systems for communication and 19% in the use of
performance measures for promotion/compensation deci-
sions construct.
5. Conclusions and limitations
The management accounting literature has paid little
empirical attention to the role of leadership style in the
control choices of top management. Researchers in the
organization design literature focus attention on the effect
of operating context on control choices. The management
literature, on the other hand, continues to debate how,
when and why leadership matters. The economics liter-
ature is just beginning to recognize that “management
matters” and are attempting to explain some of the hetero-
geneity observed in corporate governance and accounting
practices by including variables that capture managerial
traits of top management.
This paper contributes to the literature by extending
organization design models to include leadership style
while controlling for the contextual factors known to
influence control choices, namely, interdependencies and
knowledge asymmetries. We extend our understanding
of management control systems by including a structural
design choice and two management accounting control
choices that relate to the way in which top management
use these systems. We focus on “use” given the relatively
sparse empirical research examining the way in which top
management use management accounting systems. Much
of the prior literature has been concerned with the design
characteristics of management accounting systems, that is,
the proportion of financial versus non-financial measures
in the performance measurement system; the proportion
of variable pay in the compensation system, etc. And yet as
Simons (1995) and others have argued, firms often have
management accounting systems with similar technical
characteristics – what differs is the way in which these var-
ious systems are used to achieve particular purposes by top
management.
Our findings underline the importance of leadership
style in explaining control system choices. Leadership style
is a significant predictor of both the use of the planning
and control system and the use of performance measures
for compensation and promotion. In particular, we find that
top management with a consideration leadership style will
use the planning and control system as an interactive com-
munication device to informally reveal their preferences to
subordinates and to obtain input from subordinates. This
supports the management literature that demonstrates the
importance of strong interpersonal leadership traits as a
means of sharing and communicating top management’s
vision and to inspire subordinates with the confidence to
meet their expectations (Waldman and Yammarino, 1999).
Interactive communicative use of the PCS by top manage-
ment facilitates this process. We also find that initiating
structure influences the interactive communication use
of PCSs but the use of the PCS for this purpose is less
intensive than it is for those with a consideration lead-
ership style. The differences in the intensity of use by
managers with different leadership traits could be due to
the different way in which the PCS is used. It is plausi-
ble that top management uses the PCS to structure the
planning process while the consideration leadership style
is used to personally interact with subordinates, commu-
nicate their strategic preferences and to obtain feedback
from subordinates during the process. The latter use would
suggest a much more intensive use, and thus a more pos-
itive relation, for those with a consideration leadership
style. The finding that initiating structure is associated
with top management’s use of performance measurement
system for compensation and promotion is consistent
with expectations. Managers strong on this leadership
dimension will express themselves in their use of formal
systems that specific targets and then take actions based on
results.
We find no relation between leadership style and del-
egation of decision rights to subordinates. Our results
support prior empirical research demonstrating the impor-
tance of the operating environment in explaining the
delegation choice. Both subunit interdependencies and
knowledge asymmetry affects the choice to delegate deci-
sion to subordinate managers. The absence of any relation
between leadership style and delegation decisions also
questions the assumption in the management literature
that delegation is an expression of a particular leader-
ship style (Bass and Valenzi, 1974; Shapira, 1976; Kerr and
Jermier, 1978; Graen, 1989). The operating context appears
to have no effect on the use of either the PCS or the use of
performance measures for compensation and promotion.
What the findings do indicate is that it is the delega-
tion choice that explains “use”. We find a significant and
positive relation between delegation and the interactive
communication use of PCSs. It is possible that the poten-
tial moral hazard problem created through delegation of
decision rights is partly overcome by increasing the dia-
logue between superiors and subordinates in the planning
and control process. This interaction increases information
flows upwards and allows top management to reinforce
what is important to achieving the firm’s goals. In this way
superiors attempt to influence the decision choices made
by subordinates.
The results presented here are particularly important
in understanding how the leadership characteristics of top
 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16 13

management and the operating context of a firm influence
the design and use of management control systems. Orga-
nizations devote considerable resources to both improving
the technical design of PCSs and performance measure-
ment systems as well as designing appropriate structures
and incentives to accompany these systems. Our find-
ings indicate that these systems may not achieve their
desired objectives unless both the operating context and
leadership traits are considered prior to implementation.
Our major contribution relates to the findings associated
with leadership style. The general management litera-
ture devotes considerable attention to understanding how
leadership style facilitates change within organizations,
influences organizational climate and improves organiza-
tional performance and yet the accounting literature is
almost silent on the how leadership style might explain
divergent uses of PCSs and performance measurement
systems. Understanding the effect of leadership style on
control choices is important for two reasons. First, it ben-
efits those who are responsible for the selection and
development of upper level management and second it
highlights an often overlooked factor in theories of control
choices.
The study is subject to a number of potential limita-
tions. First, the model may be subject to omitted variable
bias. Second, the model is tested using survey data and
thus is subject to the usual limitations associated with such
data. We did, however, take several steps to limit concerns
with the validity of the data by providing evidence on the
construct validity of each of our measures. Our method
of estimation also allows us to deal with measurement
error. Nevertheless, we concede that at least one of our
constructs (PMS) appears to be measured with non-trivial
noise and our results should be interpreted keeping this
potential for errors-in-variables bias in mind. We also heed
Luft and Shield’s (2003) warning concerning consistency in
the levels of measurement and theory. The identification of
our sample ensures that the variables are relevant to the
respondents and their firms. We avoid problems associ-
ated with small sample settings by testing our model using
partial least squares estimation. Third, the model is rela-
tively simplistic. While this is not necessarily a limitation
we recognize that organization control involves multiple
mechanisms and this study only focuses on choices relating
to the delegation decision and the use of PCSs and perfor-
mance measurement systems. And finally, our theoretical
model is based on causal arguments and yet our data are
cross sectional. There is little that can be done to overcome
this problem and we must, therefore, rely on the theoretical
arguments developed (Cook and Campbell, 1979). Despite
the potential limitations of the study, this is the first study
that empirically assesses the impact of both the operating
context and leadership style on the design of organi-
zational structures and use of management accounting
systems.
Acknowledgements
Margaret Abernethy acknowledges the financial sup-
port from the University of Melbourne. We would like
to thank workshop participants at the 2006 MAS Section
Midyear Meeting, the University of Melbourne, Tilburg
University, Vrije Universiteit Amsterdam and Nyenrode
University as well as Michael Bromwich, Eddy Cardinaels,
Chris Ittner, Murray Lindsay, Mina Pizzini, Steve Salterio,
Frank Selto, and two anonymous referees for helpful com-
ments.
Appendix A. Description of sample

Industry # of profit centers % of profit centers

Panel A – industry distribution of sample profit centers (N = 128)

Manufacturing 33 25.8
Transportation 11 8.6
Utilities 4 3.1
Retail and wholesale 7 5.5
Banking and insurance 19 14.8
General services 54 42.2

Mean Standard deviation Minimum 10th Pctl Median 90th Pctl Maximum

Panel B – profit center and respondent characteristics (N = 128)

Respondent
Age 42.02 7.89 27.00 32 42.00 53 61.00
Experience in profit center 5.15 5.92 0.50 1 3.00 13.2 28.00
Experience in current 3.27 3.61 0.25 1 2.00 5 22.00
position
Experience of respondents −1.05 8.09 −35.00 −10 0.00 5 24.00
in their profit center
compared with
supervisora
Experience of respondents −0.26 10.13 −35.00 −10 −1.00 10 37.00
in their industry
compared with
supervisora
Profit center
Size (in # of full time 208.88 307.62 8 20.9 93.5 487.5 1800
employees)
a
Negative numbers denote that the respondent is less experienced than his/her supervisor.
14 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16

Appendix B. Descriptive statistics for the observable indicators used in the partial least squares estimation
models (n = 128)

Latent variable Label Mean Standard Minimum Median Maximum

deviation

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

Interactive communication use of planning and control systems

Indicate the extent to which you agree with the following statements: (1 = strongly agree, 7 = totally disagree). Cronbach’s alpha = 0.70
My superior and I often use the planning and control system as a IA-1 3.74 2.00 1.00 3.00 7.00
means of questioning and debating the factors affecting the strategy
The planning and control system is continuous – it demands regular IA-2 2.39 1.47 1.00 2.00 7.00
and frequent attention from managers at all levels
I use the planning and control system to discuss with my peers and IA-3 2.77 1.58 1.00 4.00 7.00
subordinates changes occurring in my organization
The planning and control system is used throughout the year to IA-4 3.93 1.85 1.00 2.00 7.00
develop and present new programs, services, and strategies
Performance measurement system
Please circle the number that best reflects your superior’s use of performance measures: (1 = not at all, 7 = to a large extent). Cronbach’s alpha = 0.52
To what extent are your compensation/promotion prospects related to PMCP-1 5.06 1.53 1.00 5.00 7.00
achieving predetermined targets?
To what extent does your superior rely on accounting numbers when PMCP-2 4.97 1.59 1.00 5.00 7.00
determining your compensation/promotion prospects?
Leadership style of consideration
Indicate the extent to which you agree or disagree with the following statement about your superior: (1 = strongly agree,
7 = totally disagree). Cronbach’s alpha = 0.75
Tries out his/her ideas in the group LSC-1 3.28 1.67 1.00 3.00 7.00
Puts suggestions made by the business unit managers into operation LSC-2 2.92 1.26 1.00 3.00 7.00
Makes his/her attitudes clear to the group LSC-3 2.62 1.40 1.00 2.00 7.00
Treats all business unit managers as his/her equal LSC-4 3.46 1.82 1.00 3.00 7.00
Gives advance notice of changes LSC-5 3.41 1.49 1.00 3.00 7.00
Looks out for the personal welfare of business unit managers LSC-6 3.66 1.54 1.00 4.00 7.00

Leadership style of initiating structure

Indicate the extent to which you agree or disagree with the following statements about your superior: (1 = strongly agree,
7 = totally disagree). Cronbach’s alpha = 0.69
Lets the business unit managers know what is expected of them LSI-1 2.28 1.34 1.00 2.00 7.00
Encourages the use of uniform procedures LSI-2 3.00 1.56 1.00 3.00 7.00
Assigns business unit managers to particular tasks LSI-3 3.26 1.72 1.00 3.00 7.00
Schedules the work to be done LSI-4 4.45 1.87 1.00 5.00 7.00
Maintains definite standards of performance LSI-5 3.00 1.35 1.00 3.00 7.00
Asks that business unit managers follow standard rules and regulations LSI-6 3.34 1.53 1.00 3.00 6.00

Knowledge asymmetry
We are interested in understanding the way in which information is distributed within your organization between you and
your superior. Compared to your superior: (1 = my superior has much more information, 7 = I have much more information).
Cronbach’s alpha = 0.73
Who is in possession of better information regarding the activities KA-1 5.73 1.38 1.00 6.00 7.00
undertaken in your business unit?
Who is more familiar with the input–output relationships inherent in KA-2 5.46 1.37 1.00 6.00 7.00
the internal operations of your business unit?
Who is more certain about the performance potential of your business KA-3 5.38 1.34 1.00 6.00 7.00
unit?
Who is better able to assess the potential impact on your activities of KA-4 4.70 1.36 1.00 5.00 7.00
factors external to your business unit?
Who has a better understanding of what can be achieved in your KA-5 5.24 1.30 2.00 5.00 7.00
business unit?
Interdependencies
Please consider the relations between your business unit and other organizational units. Please indicate to what extent:
(1 = no impact at all, 7 = a very significant impact). Cronbach’s alpha = 0.81
Your business unit’s actions impact on work carried out in other ID-1 4.44 1.80 1.00 4.00 7.00
business units of your firm
Do actions of managers of other business units impact work carried ID-2 4.34 1.67 1.00 4.00 7.00
out in your business unit?
Notes: The individual items are labeled for the purpose of cross-referencing to the tables in the main text. The theoretical range for all items is 1–7.
 M.A. Abernethy et al. / Management Accounting Research 21 (2010) 2–16
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