Journal of Accounting & Organizational Change

The indirect effect of strategic management accounting in the relationship

between CEO characteristics and their networking activities, and company
performance
Abolfazl Amanollah Nejad Kalkhouran, Bahareh Hossein Nezhad Nedaei, Siti Zaleha Abdul Rasid,
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Organizational Change, Vol. 13 Issue: 4, pp.471-491, https://doi.org/10.1108/JAOC-05-2015-0042
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Strategic
The indirect effect of strategic management
management accounting in the accounting

relationship between CEO

characteristics and their 471

networking activities, and

company performance
Abolfazl Amanollah Nejad Kalkhouran and
Bahareh Hossein Nezhad Nedaei
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Azad University of Damavand, Tehran, The Islamic Republic of Iran, and

Siti Zaleha Abdul Rasid
Universiti Teknologi Malaysia, Kuala Lumpur, Malaysia

Abstract
Purpose – The purpose of this paper is to investigate the effect of chief executive officer (CEO)
characteristics and involvement in networks on strategic management accounting (SMA) and, in turn, the
indirect effect of SMA on company performance.
Design/methodology/approach – A model is advanced and tested using partial least-squares path
modelling and data were collected from a sample of 121 service small and medium-sized enterprises (SMEs) in
Malaysia.
Findings – The results indicate significant and positive relationships between the CEO education and
the application of SMA as well as between involvement in networks and SMA. Moreover, it is found that
SMA has an indirect effect in relations of CEO education, involvement in networks and company
performance.
Practical implications – SMEs’ leaders may realize their important role in affecting outcomes by their
choices, which are in turn affected by their characteristics and activities.
Originality/value – This study provides an empirical evidence on the impact of two new factors on the
SMA by considering contingency theory and upper echelons theory simultaneously for explaining
relationships and developing a new model.
Keywords Contingency theory, Upper echelons theory, CEO characteristics,
Involvement in networks, Small and medium enterprises, Strategic management accounting
Paper type Research paper

1. Introduction
Typically, the decision-making process in small and medium-sized enterprises (SMEs) is
highly centralized, and chief executive officers (CEOs) play a key role in important decisions,
such as the adoption of new practices (Ahn et al., 2014; Lubatkin et al., 2006; Papadakis and Journal of Accounting &
Organizational Change
Barwise, 2002). According to upper echelons theory, the psychological and social Vol. 13 No. 4, 2017
pp. 471-491
characteristics of top executives drive their behaviour and shape their organization © Emerald Publishing Limited
1832-5912
outcomes (Hambrick, 2007; Hambrick and Manson, 1984). With this as a starting point, this DOI 10.1108/JAOC-05-2015-0042
 JAOC paper focuses on three important characteristics of CEOs, namely, their education,
13,4 experience, and involvement in networks. Management accounting and control systems
(MACS) can be seen as an organizational outcome or as an aspect of organizational structure
(Hiebl, 2014; Strauß and Zecher, 2013) and, consistent with upper echelons theory, is likely to
be influenced by CEO characteristics and activities (Kalkhouran et al., 2015). The theory also
argues that the personality, experience and activities of top managers significantly influence
472 their strategic choice. (Hambrick, 2007). Strategic management accounting (SMA) as one of
the management accounting practices, which have strategic orientation and developed
owing to widely published criticisms of conventional management accounting practice
(Cadez and Guilding, 2008), can be affected by CEO characteristics and activities. In this
regard, review of previous literature supported the association between the CEO-related
factors and MACS (Naranjo-Gil and Hartmann, 2006, 2007). However, very few studies have
investigated the relationship between CEO characteristics, their involvement in networks
and SMA.
In addition, in the way of developing an appropriate SMA framework for SMEs, this
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study adopts a contingency perspective. Based on the basic principle of contingency theory,
there is no single MACS suitable for all businesses (Chenhall, 2003). Drawing upon
contingency theory, the dependant variable in the model is company performance. The
fundamental tenet of contingency theory holds that company performance is a product of an
appropriate fit between the structure (SMA system) and context (contingency factors).
Consequently, it is assumed that both high- and low-performing companies exist as a result
of more or less compatible combinations of context and structure (Gerdin and Greve, 2004;
Ittner and Larcker, 2001). Stated alternatively, good fit implies enhanced performance, while
poor fit implies diminished performance (Chenhall, 2003). This study uses contingency
theory in conjunction with upper echelons theory. The aim is to find the best fit between
CEO characteristics (education, experience) and their involvement in networks, and SMA to
improve firm performance. Although earlier empirical research examined the relationship
between CEO characteristics and company performance, the findings are inconsistent. Some
studies found a positive relationship (Kaplan et al., 2012; Peni, 2012; Kalm, 2012; Kenny and
Fahy, 2011; Tendai, 2013), while others have noted a significant negative relationship
(Amran et al., 2014; Hamori and Koyuncu, 2015). Furthermore, a few studies have failed to
find any association (Bhagat et al., 2010; Peng and Luo, 2000). These mixed results
motivated this investigation into the factors that may affect the relationship between CEO
characteristics and company performance. Therefore, this study focuses on the indirect
effect of SMA. However, to the best of the authors’ knowledge, no study has investigated the
indirect effect of SMA practices in the relationship between CEO characteristics and
involvement in networks, and firm performance. Therefore, the second objective of this
research is to examine if there is an indirect effect of SMA techniques in the relationship
between CEO characteristics, involvement in networks and performance.
Finally, there is still a relative dearth of empirical research into SMA practices in the
SME context (Santini, 2013). It is not surprising, as, traditionally, SMEs were understood to
not need or use MACS owing to their simple structure and limited resources. Recent findings
in both developed and developing countries have shown the importance of such practices for
SMEs (Ahmad, 2013; López and Hiebl, 2015). Therefore, this study offers valuable
information by enhancing awareness and knowledge related to usage and role of SMA in the
SMEs context. It also provides a better understanding of the role of CEOs in SMEs. It may
help them to understand the significant influence of their choices on outcomes, choices that
are in turn affected by individual characteristics and activities.
 The remainder of this paper is structured as follows. Section 2 examines the concept of Strategic
SMA. Section 3 proposes a contingency-based framework for SMA and develops a set of management
testable hypotheses. Section 4 describes the research method and summarizes the findings. accounting
Finally, Section 5 proposes some conclusions and outlines the most important issues arising
from the study.

2. Background 473
2.1 Strategic management accounting
Conventionally, management accounting has focused on the provision of historical financial
information. This is gradually being replaced by a new trend that takes a more proactive
stance, arising from interest in competitive management information that generates value
for the firm (Cadez, 2006; Hoffjan and Wompener, 2005). These advanced practices are often
overtly strategic, and use both past and future, non-financial and financial data gathered
from internal and external sources (Kalkhouran et al., 2015; Abdul Rasid et al., 2011). Interest
in SMA seems to have been motivated by widespread criticism of traditional management
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accounting practice (Bhimani and Bromwich, 1992). This has led to their reconsideration,
integrating a strategic role based on a range of relatively new methods in the fields of
investment appraisal, costing and performance management (Cadez and Guilding, 2008).

2.2 Definitions and techniques

SMA first appeared in a paper by Simmonds (1981). Simmonds described it as the analysis
of management accounting (MA) information related to a business and its competitors to
develop strategy. While there has been increased interest in SMA in recent years, there is as
yet no universally accepted SMA framework, and the area is still in the process of being
defined (Cadez and Guilding, 2008; Roslender and Hart, 2003). Table I summarizes the
various SMA definitions.
Here, we use Cadez and Guilding’s (2008) perspective, whereby SMA can be considered
as a set of strategically oriented accounting practices. While many studies have examined
different SMA techniques (Cadez et al., 2005; Cadez and Guilding, 2012), most have focused
on large-scale enterprises (Cescon et al., 2013; Cadez and Guilding, 2008). Only a few studies
have looked at the adoption of SMA techniques in the SME context (Ahmad, 2013; Santini,
2013).

Authors SMA definition

Simmonds (1981) The analysis of MA information related to a business and its competitors to develop
business strategy
Dixon (1998) A mean which helps an organization to know more about its environment, to put
more effort into expecting changes and to be more adjustable in the face of change
Bromwich (1990) It is observed as going beyond gathering information on businesses and their
competitors, to covering the advantages that products offer to customers, and how
these advantages contribute to building and sustaining competitive advantage
Hoque (2004) A process of identifying, gathering, choosing and analysing accounting data for
helping the management team to make strategic decisions and to assess
organizational effectiveness
Cadez and Guilding SMA can be considered as a set of strategically oriented accounting techniques Table I.
(2008, 2012) SMA definitions
 JAOC 2.3 Upper echelons theory
13,4 The central idea of upper echelons theory states that the organization is a reflection of its top
managers (the so-called “upper echelons”) (Hambrick and Manson, 1984). The theory
acknowledges that the characteristics of individual top administrators affect their strategic
choices. Hambrick and Manson (1984) further postulated that these strategic choices help to
describe the performance of an organization. The theory is founded on two interrelated
474 ideas:
(1) executive’s actions are based on their personal interpretation of the strategic
circumstances they face; and
(2) these individual constructs are a function of their personality, experience and
values (Hambrick and Manson, 1984).

Past decades have seen increasing academic interest in top managers (Wei et al., 2005;
Kaplan et al., 2012). Upper echelons theory has accompanied and most likely fostered this
upsurge (Finkelstein et al., 2009; Nielsen, 2010). More recently, scholars have drawn upon it
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to analyse the association between the characteristics of top executives and MA and control
systems (Hiebl, 2014). The theory argues that the personality, experience and values of top
managers significantly affect their interpretation of the situations they face and, in turn,
influence their strategic choices (Hambrick, 2007). Hambrick and Manson (1984) highlight
the influence of top managers on “administrative complexity”, composed of several key
ingredients:

thorough formal planning systems;

complex structures;

coordination devices;

detailed budgeting; and

incentive compensation schemes.

These elements can be collectively grouped as MA or control systems (Chenhall, 2003;

Guenther, 2013) and seen as an organizational outcome or as an aspect of organizational
structure (Chenhall, 2003; Strauß and Zecher, 2013). Consistent with this view, in their
influential paper on management control systems, Malmi and Brown (2008) acknowledged
that organizational controls are something that managers can change, as opposed to
something that is imposed on them. Consequently, we can assume that the characteristics of
top managers are very influential in the design of MA and control systems (Hiebl, 2014).
This study examines two important CEO characteristics and their involvement in
networks to determine how these factors influence the adoption of SMA practices in their
enterprises.

2.4 The SMA conceptual framework

The basic principle of contingency theory holds that company performance depends on the
match between its structure (SMA usage) and context (contingent variables). Thus, high
(low)-performance firms reflect more (less) good matches between structure and context
(Gerdin and Greve, 2004). A good fit indicates improved performance, while a poor fit
indicates poorer performance (Chenhall, 2003).
A parallel objective of this paper is to develop a new SMA contingency-based
framework, founded on a systems approach (Van de Ven and Drazin, 1985). It is in the form
 of contingency theory which takes a holistic, universal approach to the examination of Strategic
interdependencies in corporations (Chenhall and Langfield-Smith, 1998; Selto et al., 1995). management
Assuming that the objective of contingency-based MA research is to examine a model
that includes accounting systems, contingency factors and outcome variables (Fisher, 1995),
accounting
this study constitutes a step in the desired direction (Cadez and Guilding, 2008). The
framework is used here to examine the association between contingent variables, namely,
CEO characteristics and their involvement in networks, and the use of SMA techniques. 475
These techniques are at the heart of the model. Consistent with earlier contingency-based
research (Chenhall and Langfield-Smith, 1998; Gerdin, 2005), various dimensions of SMA are
modelled at a general level. The dependent variable in the model is company performance.
The proposed framework is illustrated in Figure 1.

3. Hypotheses
This section reviews the SMA literature that forms the basis for hypotheses related to:

contingent variables (CEO characteristics and their involvement in networks) and
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their predicted association with SMA; and

the relationship between SMA and company performance.

3.1 CEO characteristics and SMA usage

Among the key characteristics of CEOs are quantifiable and observable features such as
education and previous work experience (Jorissen et al., 2002, 2008). Education has been
identified as a good indicator of an individual’s perceptions, values and cognitive
preferences (Hambrick and Manson, 1984; Hambrick, 2007). It is one aspect of human
capital, and its role in business survival has received much attention from scholars (Soriano
and Castrogiovanni, 2012; Boden and Nucci, 2000; Cooper et al., 1994). Moreover, it can be
very influential in companies’ strategic decisions (Papadakis, 2006) and a high level of
formal education can improve a company’s knowledge resources (Hambrick and Manson,
1984).

Figure 1.
Contingency model of
strategic
management
accounting
 JAOC Top administrators also have considerable experience gained from their operational
13,4 responsibilities. Firms can benefit from their long tenure in the same position (Peni, 2012), as
they develop richer, more comprehensive knowledge about the company (Finkelstein, 1992;
Peni, 2012). They are able to interpret and perceive situations drawing upon their
operational knowledge and training (Barker and Mueller, 2002; Hambrick and Manson,
1984; Peni, 2012). As CEOs may favour a particular strategy as a function of their experience
476 (Hambrick and Manson, 1984), their career track is expected to be a significant factor.
The literature confirms that a high level of CEO education and experience indicates a
high level of ability to develop strategic decisions, innovate and process information
(Xiaowei and Zhang, 2010; Naranjo-Gil et al., 2009; Finkelstein and Hambrick, 1996). It also
shows that individual CEOs can have a key role in deciding the direction of the company
(Ahn et al., 2014). Therefore, as CEOs of small and medium-sized firms are more constrained
and have greater opportunities to act than their counterparts in big firms, their impact is
likely to be more pronounced (Daily and Dalton, 1992).
As stated earlier, an educated and experienced CEO enhances a firm’s information and
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knowledge resources (Hambrick and Manson, 1984). Combined with the important role that
these individuals play in strategic decision-making (Xiaowei and Zhang, 2010, Papadakis,
2006), the relationship between CEO characteristics and SMA appears interesting. We
predict that higher levels of education and experience are consistent with greater use of
SMA techniques, as top managers seek to deploy their knowledge resources more effectively
and efficiently. Specifically, we predict that they are more open to changing existing
systems to make greater use of SMA. Therefore, the following hypotheses are proposed:
H1. There is a positive relationship between CEO education and the extent of adoption
of SMA techniques.
H2. There is a positive relationship between CEO work experience and the extent of
adoption of SMA techniques.

3.2 Involvement in networks and SMA usage

Involvement in networks is another contingent variable that has been recognized as an area
of concern for mangers of SMEs, and one that should be given more attention by companies
(Minai et al., 2012). SMEs must participate in the global business world or marketplace
(Zizah et al., 2007). This was underlined in the study by Eberhard and Craig (2013), who
found a positive relationship between interpersonal networking and SME’s exploration of
international markets.
The second subordinate idea in upper echelons theory argues that the demographic
characteristics can be used as “valid, albeit incomplete and imprecise, proxies of executives’
cognitive frames” (Hambrick, 2007). However, it is generally accepted that use of
demographic indicators alone fails to address the psychological and social processes that
drive executive behaviour (Lawrence, 1997), and it is also important to focus on social
processes, in this case, involvement in networks.
Networking activities enable SME owner/managers to formulate strategies to gain a
competitive advantage (Beal and Yasai-Ardekani, 2000; Jorissen et al., 2002). This requires
environmental and future-oriented information (Cadez and Guilding, 2008). SMA, with its
strategic focus, can provide this information. We predict that increased involvement in
networks leads to a greater need for strategically oriented information such as that provided
by an SMA system. Based on the above, the following hypothesis is proposed:
 H3. There is a positive relationship between involvement in networks and the extent of Strategic
adoption of SMA techniques. management
accounting
3.3 SMA usage and company performance
The relationship between the adoption of MA and organizational performance has been the
subject of much empirical research. Most studies support the idea that greater adoption of
MA (broad-scope information) is positively associated with organizational performance 477
(Baines and Langfield-Smith, 2003; Cravens and Guilding, 2001; Hoque and James, 2000;
Mahama, 2006). However, very few studies have investigated the relationship between SMA
and company performance (Cadez and Guilding, 2008; Chenhall and Langfield-Smith, 1998;
S ener and Dirlik, 2012). It has been argued that business leaders draw upon SMA as an
information support in strategic decision-making and control activities (Cinquini and
Tenucci, 2010). Therefore, management activities that involve the use of competitive
strategies and methods reflect an investment in the long-term performance of the business
(Aykan and Aksoylu, 2013). We predict that better information (provided by SMA)
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improves the effectiveness of administrative decisions, which in turn improves

organizational performance (Baines and Langfield-Smith, 2003).
Accordingly, the following hypothesis is proposed:
H4. There is a positive relationship between the extent of adoption of SMA techniques
and company performance.

3.4 CEO characteristics and involvement in networks, SMA and firm performance
H1, H2, H3 and H4 postulate that SMA usage has the indirect effect in the relationship
between the CEO characteristics and involvement in networks and performance. An indirect
effect relationship exists when the relationship between independent and dependent
variables exists through a third variable. In that case, the third variable has the indirect
effect in the relationship between the other two variables (Xiao et al., 2011). Therefore, if H1,
H2, H3 and H4 are supported, then use of SMA has an indirect effect in the relationship
between CEO characteristics and involvement in networks and performance (see Figure 1).
Based on the above, the following hypotheses are proposed:
H5. There is a positive indirect effect of SMA in the relationship between CEO
education and company performance.
H6. There is a positive indirect effect of SMA in the relationship between CEO work
experience and company performance.
H7. There is a positive indirect effect of SMA in the relationship between CEO
involvement in networks and company performance.

4. Method
The model presented here is in two parts, the measurement model (the outer model) and the
structural model (the inner model). The measurement model concentrates on the association
between latent variables (constructs) that cannot be directly determined and measurable
(observed) indicators (Henseler et al., 2009). The structural model focuses on the
hypothesized associations between the constructs (Hair et al., 2013). All of the items used in
this research are considered to be reflective measures.
 JAOC 4.1 Data collection and sample
13,4 An online survey was carried out to collect data from target respondents, who are managers
and directors mostly working in accounting and finance (such as finance managers and
senior accountants), as they were expected to have a good understanding of accounting
procedures, company practice and CEOs characteristics and activities[1], in service sector
SMEs. To determine the population of this study, reference was made to a sampling frame
478 that was obtained from the SME business directory in year 2015. One thousand service
SMEs operating in Malaysia were randomly selected using a probability sampling
technique. The main intention for adopting proportionate stratified random sampling was to
reduce the variability between the samples by creating relatively homogenous strata.
Through classifying the sampling frame into non-overlapping service activities, as shown
below in Table II, the variation attributed to the services industries effect could be reduced.
Subsequently, the sample was drawn from each stratum (i.e. service activity) proportionate
to the relative size of that stratum in the total population to ensure that each firm had an
equal chance to be selected. Of the 1000 questionnaires that were sent, 129 were returned,
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representing a response rate of about 12.9 per cent. Of the surveys that were returned, eight
were excluded because they were incomplete. The final sample therefore consisted of 121
complete responses, a response rate of 12.1 per cent. To exclude any potential response bias,
the first 37 responses were compared to the last 84 responses using the independent-samples
t-test (Hair et al., 2010). The analyses showed that for all constructs, the difference in the
means of earlier and later responses was not significant.

4.2 Measurement of variables

The initial questionnaire was pre-tested and later modified based on discussions between
seven academics and SME managers. The questionnaire aimed to collect data on the effect
of CEO characteristics and involvement in networks on SMA usage and the indirect effect of
SMA on company performance.
4.2.1 SMA usage. SMA techniques were based on the 16 SMA indicators developed by
Cadez and Guilding (2012). Value stream costing (based on Fullerton et al., 2013) and
customer segment profitability analysis (Guilding and McManus, 2002) were added to
complete the list. SMA usage was measured on a five-point Likert scale ranging from 1 (not

Service activities Frequency (%)

Computer and related services 15 12.4

Education 14 11.5
Health services 12 10
Hotels 9 7.4
Insurance 11 9.1
Post and telecommunication 12 10
Professional (i.e. consultancy, engineering, legal firms) 17 14
Restaurants 6 4.9
Transportation 11 9.1
Wholesale and retail trades 12 10
Others 2 1.6
Table II. Number of employees
Demographic Small 39 32.2
statistics Medium 82 67.8
 at all) to 5 (to a great extent). Following the pre-test, definitions of some SMA techniques Strategic
were added to the questionnaire to clarify respondent’s understanding. management
4.2.2 CEO characteristics. This measure drew on the instrument developed by Ahn et al.
(2014) to assess the status of the firm’s CEO. The measure simply asks respondents to
accounting
indicate their level of qualifications and years of experience. Level of education was assessed
on a five-point ordinal scale, where 1 corresponded to secondary school and 5 to a doctoral
degree. Experience was measured by the length of work experience in the surveyed firms
using a five-point ordinal scale, where 1 corresponded to less than five years’ work 479
experience and 5 to more than 20 years.
4.2.3 Involvement in networks. This measure was based on the instrument developed by
Jorissen et al. (2002). The instrument considers two important aspects of networking,
namely, frequency of contacts with relevant parties and participation in activities that
involve the CEO or other directors. Involvement is measured using a five-point Likert scale
ranging from 1 (not at all) to 5 (to a great extent).
4.2.4 Company performance (dependent variable). This study used the instrument
adopted by Jusoh et al. (2008), following Mia and Clarke (1999) and Govindarajan (1984), to
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measure company performance. The instrument enables outcomes to be compared. The

scale is based on multiple indicators and incorporates quantitative, qualitative, financial and
non-financial performance (Mia and Clarke, 1999). Respondents were asked to indicate their
company’s performance relative to their competitors using 12 indicators on a scale ranging
from “1” (below average) to “5” (above average).
4.2.5 Control variables. Size and environment were considered as control variables. To
realize whether there is an important dissimilarity between coefficients, scholars require to
use the partial least-squares structured equation modelling (PLS-SEM) multigroup analysis
(PLS-MGA). It is presumed that there is a categorical moderator factor (e.g. size) that effects
the relations in the PLS path model. The main goal of multi-group analysis is therefore to
reveal the influence of these categorical moderator factors (Hair et al, 2013, 2014). This study
adopted the nonparametric process which is proposed by Sarstedt et al. (2011). This study
based on the nonparametric PLS-MGA considered the effect of firm size and environment on
path coefficients of relationships in the model of this study. As this study focuses on SMEs,
thus observations are divided based on small and medium-sized companies as well as high
and low environmental uncertainty. According to the sample of study, there are 39 small
and 82 medium firms. Results indicated that there is no significant difference in the effect of
most relationships with regard to the firm size and environment.
Several statistics confirmed the factorability of the items. Statistics from Bartlett’s
test of sphericity were significant for all factors, and the Kaiser–Meyer–Olkin measures
of sampling adequacy were greater than 0.60. All Cronbach’s alphas exceeded 0.70
(Nunnally, 1978), in support of the satisfactory internal reliability of measures. The
descriptive statistics, based on the weighted average scores of the multi-item variables,
appear in Table III.

Variables Mean SD

SMA 3.15 1.103

CEO education 3.55 0.801
CEO experience 3.23 1.118
Involvement in networks 3.3 0.916 Table III.
Company performance 3.42 0.92 Descriptive statistics
 JAOC 4.3 Data examination
13,4 SmartPLS 3.0 and SPSS 21 were used to analyse the model and estimate the quality of the
survey data. SmartPLS is a second-generation PLS-SEM method that has been applied in
other accounting research (Hall, 2008). PLS-SEM was used for various reasons: it performs
well under small sample size and non-normal conditions and imposes minimal demands on
measurement scales (Henseler et al., 2009). The PLS approach was used to estimate the
480 model because its formal premises make it applicable to a range of flexible applications
(Hoeck et al., 2010).
Each completed questionnaire was screened for errors and omissions. Normality tests
were not necessary, as PLS regression analysis does not require the data to be distributed
normally (Chin et al., 2003). Instead, as in earlier PLS research, fit was assessed by the
overall significance of the relationships between latent variables and the explained variance
of endogenous constructs (Chapman and Kihn, 2009). Three exogenous (independent)
variables and two endogenous (dependent) constructs were used in this research. The
number of items used to measure each of the constructs ranged from 9 to 18. CEO
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characteristics (education and experience) were considered as single item constructs,

measured by a single indicator (Falk and Miller, 1992). These constructs can be used like
any other variable in SmartPLS because the trait (education) increases with the response. A
value of 2 (short-term vocational education) indicates less education than 5 (doctoral level).
The variable is therefore ordinal, rather than categorical. Therefore, it is included in
SmartPLS as the only indicator of a latent variable.

4.4 Model assessment

4.4.1 Internal consistency. The two most common methods used to evaluate internal
consistency are composite reliability (CR) and Cronbach’s alpha (Hulland, 1999). As
Cronbach’s alpha has some restrictions in the sample population, it was better to apply CR,
which is generally interpreted in the same way as Cronbach’s alpha. In exploratory research,
CR values of 0.60-0.70 are acceptable. However, in advanced studies, values of 0.70-0.90 are
considered satisfactory (Nunnally and Bernstein, 1994). Table IV shows the CR for the
reflectively measured constructs used in this study. This shows that the criterion is met, as
the CR is above 0.70.
4.4.2 Convergent validity. To establish convergent validity, most researchers consider
outer loadings of items and the average variance extracted (AVE). At a minimum, all items’
outer loadings should be statistically significant. Because a significant outer loading could
still be fairly weak, a common rule of thumb is that the (standardized) outer loadings should
be 0.7 or higher (Hair et al., 2014). Rather than automatically eliminating indicators when
their outer loading is below 0.70, researchers should carefully examine the effects of item
removal on the CR and on content validity. Generally, indicators with outer loadings of
0.40-0.70 should be considered for removal from the scale only if, by deleting the indicator,
the CR increases (Hair et al., 2013). Indicators with outer loadings below 0.40, however,
should always be eliminated from the scale (Hair et al., 2011).

Composite reliability
Table IV. Networks 0.852
CR for reflectively PERFORMANCE 0.912
measured constructs SMA usage 0.906
 An AVE value of 0.50 or higher indicates that, on average, the construct explains more than Strategic
half of the variance of its indicators. On the other hand, an AVE of less than 0.50 indicates management
that, on average, more errors remain in the items than the variance explained by the
accounting
construct (Henseler et al., 2009). Therefore, the desired level for convergent validity are outer
loadings more than 0.7 and an AVE value of 0.50 or higher. To meet these criteria, several
indicators were eliminated. Specifically, five networking indicators (NET1, NET2, NET3,
NET4 and NET 5), 11 SMA usage (SMA1, SMA2, SMA3, SMA4, SMA5, SMA6, SMA12, 481
SMA13, SMA14, SMA15 and SMA18) and seven performance indicators (PER4, PER5,
PER6, PER9, PER10, PER11, and PER12) were removed. Following elimination, all of the
constructs presented here meet the AVE requirement. Table V shows the convergent
validity for reflectively measured constructs in terms of outer loadings and AVE.
4.4.3 Discriminant validity. Discriminant validity depends on whether each construct
shares more variance with its measures than with other constructs in the model (Chin, 1998;
Hulland, 1999); thus, the square root of the AVE must exceed the construct intercorrelations
in the model. As Table VI reveals, the construct intercorrelations in the model did not exceed
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the square root of the AVE for the constructs. Therefore, the psychometric properties of the
instruments were adequate to support our interpretation of the structural model.

Constructs and measurement items Standardized loadings Average variance extracted

Involvement in networks (NET) 0.591

NET6 0.758
NET7 0.824
NET8 0.77
NET9 0.721

Firm performance (PERFORMANCE) 0.676

PER1 0.842
PER2 0.865
PER3 0.832
PER7 0.821
PER8 0.744

Strategic management accounting techniques (SMA) 0.548

SMA10 0.744
SMA11 0.759
SMA13 0.701
SMA16 0.729 Table V.
SMA17 0.725 Convergent validity
SMA7 0.736 for reflectively
SMA8 0.785 measured constructs

Education Experience Networks PERFORMANCE SMA usage

Table VI.
Education 1
Experience 0.33 1 Discriminant validity
Networks 0.38 0.37 0.769 for reflectively
PERFORMANCE 0.35 0.276 0.363 0.822 measured constructs
SMA usage 0.323 0.544 0.452 0.406 0.74 (Fornell–Larcker)
 JAOC 4.5 Structural model
13,4 According to Hair et al. (2013) and Henseler et al. (2009), evaluating the inner model consists
of several steps. The first is to assess the amount of variance explained in the endogenous
constructs (R2). R2 is a measure of the model’s predictive accuracy and is calculated as the
squared correlation between a specific endogenous construct’s actual and predicted values.
The R2 value ranges from 0 to 1, with higher levels indicating higher levels of predictive
482 accuracy. It is difficult to provide a rule of thumb for acceptable R2 values, as this depends
on the model complexity and the research discipline (Hair et al., 2013). According to Cohen
(1988), R2 values of 0.2, 0.13 and 0.26 are considered as small, medium and large,
respectively. In this study, R2 values for SMA and PERFORMANCE are 0.34 and 0.142,
respectively (Table VII). This indicates that the ability of the model to explain variance
ranges from moderate to substantial (Cohen, 1988).

4.6 Hypotheses testing

The structural model represents the hypothesized relationships between constructs. The
path coefficient ( b ) shows the power of the relationship between the latent variables (Idris
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and Mohammad, 2014). Whether a coefficient is significant ultimately depends on its

standard error that is obtained by means of bootstrapping. The bootstrap standard error
makes it possible to compute the empirical t-values (Hair et al., 2013, Henseler et al., 2009).
When this value is greater than a critical value, we can say that the coefficient is significant
at a certain error probability (i.e. significance level). Commonly used critical values for two-
tailed tests are 1.65 (significance level = 10 per cent), 1.96 (significance level = 5 per cent)
and 2.57 (significance level = 1 per cent) (Hair et al., 2011). Overall, the results show that all
path coefficients were statistically significant at 0.05 levels (Table VIII). Rather than simply
reporting the significance of a parameter, it is also valuable to report the bootstrap
confidence interval, as it provides additional information on the stability of a coefficient
estimate. If zero does not fall in this confidence interval, we can conclude that the outer
weight is significant (Hair et al., 2014, Henseler et al., 2009). As Table VIII shows, education
and networking were positively and significantly correlated with SMA usage, while
experience was positively but not significantly correlated. This provides support for H1 and
H3. Moreover, SMA and PERFORMANCE were positively and significantly correlated,
which supports H4.
H5, H6 and H7 stated indirect effect of SMA in the relationships between contingency
variables and company performance. To examine the indirect effect, the PLS algorithm and

R2
Table VII.
Structural model PERFORMANCE 0.142
evaluation SMA usage 0.34

Suggested direction b t-value Support

Education -> SMA usage þ 0.381 4.54 Yes

Table VIII. Experience -> SMA usage þ 0.028 0.38 No
Path coefficient and Networks -> SMA usage þ 0.312 3.922 Yes
hypothesis testing SMA usage -> PERFORMANCE þ 0.299 3.15 Yes
 bootstrapping procedures with 1000 resamples were ran on the full model to obtain the path Strategic
coefficient and the significance level of these paths. As illustrated in Table IX, all paths management
other than experience were statistically significant, which provides empirical evidence of an
indirect effect. To examine the statistical significance of the indirect effect, bootstrapping
accounting
procedures with 5000 resamples were used (Preacher and Hayes, 2008). Based on the
bootstrapping analysis, shown in Table IX, the indirect effect b 1 = 0.0933 was significant
with a t-values of 2.23. Therefore, it can be concluded that the indirect effect of SMA is
statistically significant in the relation between education and PERFORMANCE. The
483
bootstrapping procedure demonstrates that the indirect effect b 2 = 0.0798 was significant
with a t-values of 2.35, which confirmed the indirect effect of SMA in the relation between
networking and PERFORMANCE.

5. Discussion and conclusion

This study makes several contributions to the literature. First, it offers a conceptual SMA
framework that expands on the earlier literature. Second, it uses quantitative empirical data
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to examine several hypotheses developed from contingency theory. The results support the
main postulates of contingency theory, which states that organizational performance
depends on the fit between its structure and context. Three factors (qualifications,
experience and involvement in networks) were shown to have a potential contingency-based
relationship with SMA. The result from the PLS path model supports most of the
hypothesised relationships. In particular, SMA usage is positively associated with education
and involvement in networks. In turn, SMA usage is shown to have a positive effect on
company performance. This finding confirms the important role of SMA practices in SMEs
in improving performance. It seems likely that SMA usage and other competitive strategies
and techniques are indicators of an investment in its long-term performance (Aykan and
Aksoylu, 2013).
The PLS path model fit was statistically significant and indicated an indirect effect
(Gerdin and Greve, 2004), which provides support for the contingency theory premise.
Moreover, the relatively large proportion of explained variance in SMA usage and company
performance shows that these factors are relevant in the SMA framework. The results
showed that education is indirectly related to company performance through SMA. This
finding is unsurprising within the framework of upper echelons theory (Hambrick and
Manson, 1984). MACS can be seen as an organizational outcome or as an aspect of
organizational structure (Chenhall, 2003; Strauß and Zecher, 2013), and the characteristics of
top managers can affect their design (Hiebl, 2014; Malmi and Brown, 2008; Naranjo-Gil and
Hartmann, 2007).
SMA can provide information support for strategic decision-making and control
activities and, consequently, assist businesses to achieve profitability (Cinquini and
Tenucci, 2010). It can be concluded that SMA has a significant indirect effect in the
relationship between education and company performance. The same argument can be
extended to the role played by SMA in the relation between involvement in networks and
company performance. On the other hand, the findings showed that the relationship

Hypotheses Indirect effect t-value Support

Table IX.
EDU-> SMA-> PERF b 1 = 0.0933 2.2336 Yes Hypotheses test for
Networks-> SMA-> PERF b 2 = 0.0798 2.3529 Yes indirect effect
 JAOC between experience and SMA usage was not statistically significant (despite positive beta
13,4 path coefficients).
As contingency-based management accounting research is often criticized for the
piecemeal way in which it is conducted (Chenhall and Langfield-Smith, 1998; Fisher, 1995;
Cadez and Guilding, 2008), this study contributes to the literature by examining the effect of
upper echelon characteristics and SMA practices on company performance. If the goal of
484 contingency-based management accounting studies is to examine a model that includes
several accounting systems, several contingent variables and several outcome variables
(Fisher, 1995), this study is a step in the right direction. A further contribution is to increase
the explanatory power of management accounting research.
Overall, the study contributes to knowledge by integrating contingency theory and
upper echelons theory into a new framework that is empirically tested. The model provides
insights into the relations between contingency factors (independent variables) and
company performance (dependent variable) via the indirect effect of SMA. The study also
extends knowledge about the contingent variables that affect SMA use in SMEs. It considers
three important factors (education, work experience and involvement in networks). The
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results confirm that these three novel factors, which emerge from upper echelons theory,
should be added to the contingency paradigm as new variables that significantly influence
SMA use. In addition, while contingency theory emphasizes the importance of the indirect
effect of MACS in the relationship between contingency factors and organizational
performance, only a few studies have evaluated the role of SMA (Cadez and Guilding, 2008;
Santini, 2013). Thus, this study expands on the SMA literature.
However, the study has a number of limitations. First, it does not take into account the
possible effects of different industry categories. In the context of contingency theory, it
might be valuable to focus on a sample from one specific category of service activities. Such
a sample would be more standardized and may predict the adoption of certain kinds of SMA
techniques. In turn, this might make the contribution of contingent variables to
dissimilarities clearer. In addition, a case study could highlight dissimilarities and provide a
detailed rationale outlining how and why different techniques are used or not.
Furthermore, this study concentrated on the service sector. The design of the sample
thus limits the generalizability of the findings. Therefore, future studies could look at
more than one segment. Finally, the limitations of the survey method mean that the
results should be treated with caution. Future work that adopts a more intensive, case
study methodology has great scope to improve our understanding of the drivers and
outcomes of SMA adoption.

Note
1. Kindly it was requested in the cover letter of the questionnaire that the parts related to the CEOs
field by themselves, if target respondents do not have enough information about CEOs’
characteristics and activities.

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491
Corresponding author
Abolfazl Amanollah Nejad Kalkhouran can be contacted at: abolfazlaman@gmail.com
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