1 - How CFO's Determine Management Accounting Innovation

How CFO’s determine management accounting
innovation: An examination of direct and indirect

effects
David Naranjo-Gil – Pablo de Olavide University, Sevilla, Spain
Victor S. Maas – University of Amsterdam, Amsterdam Business School,
Frank G.H. Hartmann – RSM Erasmus University
Corresponding author:
David Naranjo-Gil, Pablo de Olavide University,

Carretera Utrera Km.1..41013 Sevilla (Spain).
Tel: +34 954 349 847.
Email: dnargil@upo.es
Acknowledgements:
This paper has benefited from comments from Margaret Abernethy and from
workshop participants at the University of Amsterdam, RSM Erasmus
University, the 5th Conference on New Directions in Management Accounting
(Brussels, December 2006), the 2007 AAA Annual Meeting and the 4th
Conference on Performance Measurement and Management Control (Nice,
September 2007).
Electronic copy available at: http://ssrn.com/abstract=1296723

How CFO’s determine management accounting
innovation: An examination of direct and indirect
effects
Abstract
Although management accounting innovations such as Activity-Based
Costing, the Balanced Scorecard and benchmarking have received much
academic interest in recent years, our understanding of why some
organizations adopt and implement such new management accounting systems
(MAS) and others do not, is still underdeveloped. This paper contributes to the
literature by examining the role of the CFO in MAS innovation. We
hypothesize that individual differences between CFO’s are predictive of
organizations’ use of innovative MAS. In addition, we propose that CFO
characteristics moderate the extent to which organizations rationally adapt to
(environmental) contingencies. To examine this second prediction we compare
the effects of strategy and historical performance on the adoption of
innovative MAS for organizations with different types of CFO’s. We test our
hypotheses using a combination of archival and survey data from the public
healthcare sector in Spain. Our results are generally supportive of our
hypotheses.
Keywords: Management Accounting Innovation, Strategy, Historical
Performance, CFO Age, CFO Tenure, CFO Education.
Electronic copy available at: http://ssrn.com/abstract=1296723

1. Introduction
Increasing levels of competition and technological change have focused the
attention of practitioners and academic researchers on management accounting
system (MAS) innovation. Following the critique that management accounting
systems had lost their relevance (Johnson and Kaplan, 1987), organizations
have become interested in new techniques that are allegedly better able to
support the development and implementation of organizations’ strategic
policies. Whereas these techniques are deemed increasingly important for
today’s more complex and dynamic business environments (Foster and Ward,
1994; Ittner and Larcker, 1998), evidence shows that the adoption of
management accounting innovations still varies widely across organizations
and sectors (e.g. Krumweide, 1998; Baines and Langfield-Smith, 2003) and
that many organizations do not use advanced MAS despite their apparent
technical superiority (Gosselin, 1997; Fullerton and McWatters, 2004).
Several management accounting studies have tried to explain this
phenomenon. Many of these have relied on a contingency perspective to
explain innovation adoption decisions and subsequent implementation
processes (e.g. Gosselin, 1997; Baines and Langfield-Smith, 2003, Baird et al.
2004). These studies argue that organizational and environmental
contingencies determine the degree to which organizations will benefit from
implementing innovative MAS and (implicitly) assume that the decision to
innovate reflects a rational trade-off between the expected costs and benefits
(Chenhall, 2003; Tillema, 2005). Other researchers, however, stress that
rational adaptation to environmental circumstances cannot fully explain
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organizations’ adoption and use of new MAS and point to institutional and
managerial factors that go beyond the rational trade-off of expected costs and
benefits of innovation (e.g. Abernethy and Chua, 1996; Burns and Scapens,
2000; Hyvönen and Järvinen, 2006)
In this study we explore one such latter factor, as we focus on the
characteristics of the organization’s Chief Financial Officer (CFO) to explain
management accounting innovation. Although the general management
literature widely acknowledges that top manager characteristics are predictive
of organizational outcomes (e.g. Finkelstein and Hambrick, 1996), little is
known about how individual managerial differences affect accounting and
control systems design (cf. Emsley et al., 2006). In this paper, we develop and
test the general thesis that CFO’s differ in their support for MAS innovations,
focusing on CFO’s age, tenure and educational background.
We examine both the direct effects of these CFO characteristics on
innovation, and how these characteristics affect the impact of strategy and
historical performance on innovation. These latter two factors are identified as
important drivers of organizations’ need for innovation in the wider literature
(e.g., Bolton, 1993; Chenhall and Langfield-Smith, 1998). In summary, this
paper aims to provide a more comprehensive view of management accounting
innovation by simultaneously looking at organizational factors that determine
the potential benefits from innovation, and CFO characteristics that determine
organizations’ ability and willingness to actually initiate and implement
administrative change.
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We test our hypotheses using both survey data from the public hospital
sector in Spain and archival data. The survey data is collected as part of a
larger research project that aims at increasing our understanding of how top
managers impact the design and use of management accounting systems.
Previous papers from this project have addressed how top management team
composition affects the use of management accounting in strategy
implementation and strategic change (Naranjo-Gil and Hartmann, 2006,
2007a, 2007b). In this paper, we focus on how a specific board member (the
CFO) and strategic position drive MAS innovation1.
Our study contributes to the existing management accounting literature
in a number of ways. First, we provide evidence that our understanding of
MAS innovation can be increased by simultaneously investigating factors that
provide organizations with an incentive for innovation and factors that
determine organizations’ ability and willingness to change. In addition, our
study suggests innovation is at least partly explained by the interaction of
these different types of factors. Second, this study contributes to the growing
stream of research on the roles of management accountants and financial
managers in organizations (Byrne and Pierce, 2007; Burns and Baldvinsdottir,
2005; Indjejikian and Matejka, 2006). Our finding that MAS innovation
depends on the age, tenure and educational background of the CFO adds
significance to the limited existing evidence that the individual acting as CFO
has a significant effect on organizations’ management accounting practices
(Emsley, 2005; Emsley et al. 2006) and suggest that management accounting
research may profit from a further focus on the individual differences between
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CFO’s. Third, our focus on strategy as an antecedent of MAS innovation
extends existing research on the interplay between strategic priorities and
MAS design (Langfield-Smith, 1997; Gosselin, 1997; Chenhall and Langfield-
Smith, 2003). Our paper is the first in the management accounting literature to
examine how organizations’ relative performance record over a number of
years affects their inclination to innovate. While this issue has been discussed
extensively in the general management literature (Bolton, 1993), there is only
anecdotal evidence that historical performance is an antecedent of MAS
design (e.g. Reid and Smith, 2000). Finally, our study’s focus on the
healthcare sector provides a contribution to the literature, as the healthcare
industry has an increasingly important position in most European economies.
By focusing on this sector in Spain, we extend evidence on MAS innovation
beyond manufacturing settings (cf. Cavalluzzo and Ittner, 2003; Lapsley and
Wright, 2004), and beyond the Anglo-Saxon and Scandinavian contexts in
which MAS innovation has primarily been studied (e.g. Reid and Smith, 2000;
Malmi, 1999, Ax and Bjornenak 2005). Methodologically, we believe that
studying accounting innovation within one specific sector allows us to control
for industry effects which may have played a role in earlier studies (e.g.
Gosselin, 1997; Krumweide 1998).
The remainder of this paper is organized as follows. Section 2 reviews
the literature and develops hypotheses about the relationships between
strategy, historical performance, CFO characteristics and the use of innovative
MAS. Section 3 describes the research method used. Section 4 presents the
6
results of the empirical analysis. Finally, Section 5 discusses the conclusions
and limitations of this study and points towards directions for future research.
2. Hypothesis development
In a broad sense, management accounting innovation has been defined as the
adoption of a management accounting technique or tool that is new to the
adopting organization (cf. Daft, 1978; Demanpour, 1991). In this study, we are
particularly interested in the extent to which organizations are early users of
innovative management accounting techniques or tools comparative to
organizations with similar goals. This is the typical definition used in the
innovation diffusion literature to address the relative innovativeness of
organizations (e.g. Kimberly and Evanisko, 1981; Rogers, 1983; Swanson,
1994). As regards management accounting innovation, we are interested in the
set of tools and techniques that have been developed over the past two decades
(Chenhall and Langfield-Smith, 1998; Ittner and Larcker, 1998). In particular,
this study focuses on three such innovations: the Balanced Scorecard (BSC,
Kaplan and Norton, 1996; Ax and Bjornenak, 2005), Activity Based Costing
(ABC, e.g. Shields, 1995) and Benchmarking (Elnathan, et al., 1996). Not
only have these three innovations received most attention in the innovation
adoption literature so far, the potential significance of these techniques was
also underlined in interviews with managers from the target population made
during the planning stage of this study. Thus, this study aims to identify
factors that distinguish organizations which have adopted these three
techniques from organizations that continue to rely on more traditional MAS.
7
Because these techniques have been described in some detail in the extant
management accounting literature, we only provide a brief description of their
most notable characteristics.
The BSC is a performance measurement system that complements
traditional financial measures with operational measures which provide more
insight into the organization’s strategic success (Kaplan and Norton, 1996). As
BSCs provide a comprehensive set of indicators of present and future
performance (e.g. Banker, et al., 2004), they are deemed to be of practical use
in industries where performance is multi-faceted, such as the healthcare
industry.
ABC is a cost allocation technique that responds to the cost distortions
inherent in traditional product-costing systems by linking resource expenses to
the variety and complexity of products, not just to the physical volumes
produced. Accordingly, ABC defines not only products, but also product
batches, customers, suppliers, distribution channels, brands and market
segments as cost objects. Furthermore, activity drivers are identified at
different levels: unit level activities, batch level activities, product sustaining
activities and facility sustaining activities (Swenson, 1995; Cooper and
Kaplan, 1999). ABC is claimed to be beneficial in complex organizations, in
which activities consume various levels of overhead.
Finally, benchmarking is a management tool that includes adopting
‘best practices’ and setting goals to achieve ‘best practice’ performance levels
(Coburn, et al., 1995; Elnathan, et al., 1996). Benchmarking works inwardly
by helping organizations set desired goals and objectives, measuring the
8
performance toward desired objectives, and achieving them through
continuous improvement (Bogan and English, 1994). Thus, benchmarking is
also a management accounting technique as it entails target setting based on
‘best in field’ standards rather than some average performance or historical
performance level (Banker, et al., 1998). Indeed, the healthcare industry is a
large producer of performance data, but embedding data from other hospitals
in the management process is still not widespread2.
Extant research indicates that adoption levels of the BSC, ABC and
benchmarking differ widely between industries. Especially within the public
sector, diffusion of accounting innovations tends to be slow and fragmented
(Ter Bogt and Van Helden, 2000; Cavalluzzo and Ittner, 2003; Lapsley and
Wright, 2004). Overall, however, the literature also suggests that adoption
level variance cannot solely be explained by industry effects, as available
evidence points to firm characteristics that stimulate or hinder adoption of
innovations (e.g. Gosselin, 1997; Chenhall and Langfield-Smith, 1998; Ax and
Bjornenak, 2005; Maiga and Jacobs, 2005). In particular, the literature
suggests that these firm characteristics fall into two categories.
The first category of characteristics concerns the factors that determine
the potential benefit of adopting innovative MAS. Thus, contingencies can be
identified that affect organizations’ need for management accounting system
innovation and change (Reid and Smith, 2000; Baines and Langfield-Smith,
2003; Chenhall, 2003). Our study focuses on two such contingency variables
of which prior literature suggests that they might affect MAS innovation:
strategy and historical performance.
9
The second category of factors concerns the extent to which
organizations rationally adapt to situational needs. Research suggests some
organizations are in better “fit” with their environment than others (Chenhall,
2003; Donaldson, 2001). According to the strategic management literature,
this may in part be explained by individual differences between managers,
who ultimately decide about firms’ structural adaptation, competitive moves
and levels of innovation (Finkelstein and Hambrick, 1996; Carpenter, 2004)
Thus, evidence shows that adoption and use of new management systems
requires that responsible managers recognize the need for innovation and
initiate the necessary change (Bantel and Jackson, 1989; Elenkov, et al.,
2005). In the case of MAS innovation, the key individual responsible for the
decision to adopt and implement new accounting techniques is the
organization’s Chief Financial Officer (CFO) (Siegel and Sorenson, 1999;
Emsley, 2005). Based on Upper Echelon theory (Hambrick and Mason, 1984;
Finkelstein and Hambrick, 1996), we suggest that the CFO’s demographic
characteristics, such as age, tenure and educational background, are predictors
of the CFO’s willingness to innovate.
Below we further elaborate our arguments that MAS innovation is the
product of both rational adaptation to organizational needs and CFO’s ability
and willingness to recognize and act upon these needs. We develop hypotheses
that relate strategy and historical performance to MAS innovation, both
directly and in interaction with CFO demographic characteristics.
Strategy and MAS innovation
10
In line with most management accounting research, we adopt Miles and
Snow’s (1978) typology and conceptualize strategy as an organization’s
position on the continuum between prospector and defender types. Prospector
type organizations are characterized by their dynamism in seeking new market
opportunities and their urge and capability to develop new products and to find
creative new responses to suit customers’ demands. Defender type
organizations, on the other hand, are more reactive than proactive market
players. They operate within narrow product-market domains and compete
primarily on price and operational efficiency (Miles and Snow, 1978;
Gosselin, 1997). Conceptualizing strategy as an organization’s position on the
continuum between prospector and defender types means that in reality
organizations may combine prospector and defender characteristics. For our
explanation of the relation between strategy and MAS we will, however, refer
to the pure types.
Although empirical evidence on the relationships between strategic and
MAS characteristics is not unambiguous (Langfield-Smith, 1997), research
generally suggests that more complex and proactive strategies (i.e. prospector
organizations) require more advanced MAS. The reason for this is that
prospector organizations need to make day-to-day decisions on a wider range
of issues and therefore need timelier, less aggregated and broader scope
information (Langfield-Smith, 1997; Bouwens and Abernethy, 2000). For
example, if customer satisfaction, new product development and flexibility are
central to an organization’s strategy, measures that focus on these aspects of
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performance need to be integrated into the organization’s MAS (Baines and
Langfield-Smith, 2003)
Existing empirical evidence also indicates that prospector firms are
more likely to adopt advanced management accounting techniques. To
illustrate, Simons (1987) found that prospectors are more likely to adapt their
cost systems to the needs of their users than defenders are. Similarly, Gosselin
(1997) argued and found that prospectors were more likely to adopt activity-
based management techniques, not only because they had a higher need for
these techniques, but also because their focus on flexibility and product
innovation made it easier for them to adopt and implement new administrative
systems. Chenhall and Langfield-Smith (1998) hypothesized that the
performance effects of innovative MAS depend on organizations’ strategies,
and indeed found that these effects were generally higher for organizations
focusing on product differentiation instead of on low prices. Finally, Bouwens
and Abernethy (2000) showed that firms making more highly customized
products were more likely to have adopted broad scoped MAS. In summary,
theory and evidence lead to the following hypothesis:
H1: Organizations that pursue a prospector strategy will make more
extensive use of innovative MAS.
Historical performance and MAS innovation.
The historical performance of an organization is another factor that might
influence the need to adopt innovative MAS (cf. Mone et al. 1998). Poor
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performance creates a gap between an organization’s actual results and those
desired by managers and stakeholders. In general, when traditional systems
and processes fail to increase results, firms will need to look for alternatives.
Thus, organizations which have performed relatively badly over the previous
period will experience a relatively high, and perhaps urgent, need to change
their systems, as has been widely recognized in the general management
literature (Lant, et al., 1992; Mone, et al., 1998). Empirical evidence supports
the notion that firms which experience performance downturns are more likely
to take risks and to adopt innovations. For example, Hundley et al. (1996) and
Greve (2003) presented evidence of increased R&D intensity in firms facing
decreased profitability. Similarly, Zajac and Kraatz (1993) showed that
resource scarcity and financial distress were associated administrative changes
in the higher education industry. Other researchers have demonstrated a
positive effect of low performance on risk taking by firms (Bromiley, 1991)
and a higher willingness of low performing organizations to engage in risky
structural innovations (Bolton, 1993). Although this may explain an effect on
innovation generally, we also expect low performance to increase management
accounting innovation, as underperformance is often attributable to the lack of
useful management information available from traditional MAS (cf. Johnson
and Kaplan, 1987). Indeed, Reid and Smith (2000) provide evidence that cash
flow crises and shortfalls of finance stimulated the implementation of
advanced management techniques, including MAS techniques, such as ABC.
In conclusion, performance downturn might stimulate the search for more
useful MAS and the adoption of innovative management accounting
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techniques. It should be recognized, however, that the effect of low
performance on MAS innovation is not self-evident: it has sometimes been
argued that performance may instead positively affect innovation because
better performing organizations have slack resources available to engage in
costly change processes (Bolton, 1993; Mone et al. 1998). Consequently, we
test the following hypothesis:
H2: Organizations that have a relatively low historical performance will
make more extensive use of innovative MAS.
It should be noted here that the majority of existing studies (e.g., Abernethy
and Guthrie, 1994; Naranjo-Gil and Hartmann, 2006, 2007a, 2007b) model
strategy and performance as outcomes rather than antecedents of MAS design
and use. Thus, MAS has been found to affect strategy implementation
(Naranjo-Gil and Hartmann (2006, 2007b), to affect strategic change
(.Naranjo-Gil and Hartmann (2007a), and to interact with strategy to
determine performance (Abernethy and Guthrie, 1994). Our focus here is on
strategic position, which serves as an antecedent of MAS. Acknowledging that
the relationship between MAS and strategy is most likely dynamic and
recursive over time and, therefore, more complex than any of these individual
perspectives (Langfield-Smith 1997); our model is consistent with any such
fuller model of greater complexity (Simons 1987, Langfield-Smith, 1997,
Chenhall 2003).
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The role of the CFO
While strategy and historical performance determine an organization’s need
for innovative MAS, it is ultimately the organization’s board of management
which needs to make the actual adoption decision and which will determine
the extent of use of new systems throughout the organization. Previous
research has analyzed team-level characteristics, such as professionalism and
heterogeneity of the top management team (see Naranjo-Gil and Hartmann,
2006, 2007). This paper focuses on CFO characteristics, since within the
management board the CFO is generally in charge of developing and
operating the organization’s MAS (cf. Anthony, 1988; Siegel and Sorensen,
1999; Emsley, 2005). Consequently, our general expectation is that the use of
innovative MAS crucially depends on the CFO’s willingness to commit to the
innovation and act as a sponsor for the new systems.
Research indicates that accountants differ in the extent to which they
are open to management accounting innovation and take initiatives to improve
operational and strategic decision-making processes (Hopper, 1980; Johnston,
et al., 2002; Burns and Baldvinsdottir, 2005; Emsley, 2005). Studies that
discuss the role of financial managers (CFO’s, controllers, management
accountants) in organizations generally argue that financial managers are, to
some extent, reluctant to take a proactive role in managing the organization
and prefer to see their own role as that of a relatively independent ‘watchdog’.
For example, Hopper (1980) found that there was a considerable difference
between the services general managers demanded from their finance staff and
the services that they actually delivered, which in part may be explained by
15
financial managers’ ‘conservative and bureaucratic orientations fostered
during early training and work experiences’ (Hopper, 1980, p. 402). Pierce
and O’Dea (2003) confirmed the existence of such an expectation gap, and
their empirical results suggested that this gap was largely due to the fact that
financial managers gave priority to financial reporting, showing a lack of
knowledge and skills necessary to take a broader perspective in this particular
study. Also, Johnston et al. (2002) found that management accountants were
reluctant to participate in operational decision-making, especially when this
concerned operational innovation and change programs. They argue this
reluctance was grounded in management accountants’ focus on their
independent ‘watchdog role’ that focused on ‘preventing things from
happening’ (Johnston, et al., 2002, p. 1331). Joseph et al. (1996) found that
there was considerable variance in the extent to which management
accountants considered external financial reporting demands an important
antecedent of MAS system design. While some accountants agreed that
internal systems were primarily designed to meet external demands, others
strongly disagreed and stressed the importance of information used for
operational and strategic decision-making. Finally, Emsley (2005) directly
studied management accountants’ willingness to adopt and implement MAS
innovations. He argued that some management accountants would show a
higher level of innovativeness because they were more involved in managerial
decision-making and, therefore, were more likely to know whether an
innovation is appropriate and more likely to understand what information is of
most value.
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In summary, the literature suggests that financial managers’ propensity
to support MAS innovation varies widely. However, the source of this
variance is not entirely clear. We therefore need to identify variables that are
indicative of CFO’s innovativeness. The Upper Echelon literature proposes
that demographic variables provide good proxies for underlying cognitive and
affective characteristics that determine managers’ decision-making and are
therefore predictive of organizational outcomes (Hambrick and Mason, 1984;
Finkelstein and Hambrick, 1996). There are a vast number of studies which
support this proposition (Finkelstein and Hambrick, 1996; Carpenter, et al.,
2004) and a number of studies has also found associations between board
members’ demographic characteristics and organizations’ innovation levels
(e.g. Bantel and Jackson, 1989; Young, et al., 2001; Camelo-Ordaz, et al.,
2004; Auh and Menguc, 2005; Elenkov, et al., 2005). In addition, Naranjo-Gil
and Hartmann (2006, 2007) show that top management team characteristics
are related to the design and use of MAS. In particular, we believe that age,
tenure and educational background may be indicative of the CFO’s
innovativeness.
Concerning age, several studies have examined the relationship
between managers’ age and innovativeness and generally observe a negative
relationship (e.g., Young, et al., 2001). This is commonly attributed to the
negative association between age and dynamic lifestyle, and age’s declining
effect on cognitive capabilities and energy levels (cf. Finkelstein and
Hambrick, 1996). Older managers are less able to evaluate new ideas quickly
and to integrate them effectively in decision-making. As age increases,
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flexibility decreases and rigidity and resistance to change increase (Wiersema
and Bantel, 1992). Older managers thus prefer security and generally support
the present status quo, while younger managers like to take risks and to initiate
new projects that might advance their careers (Finkelstein and Hambrick,
1996; Tihanyi, et al., 2000; Young, et al., 2001). Concerning MAS, older
CFO’s will have had more traditional accounting education, and will have
spent most of their career in a traditional function in which professional
independence and bookkeeping were key performance variables (Hopper,
1980; Granlund and Lukka, 1998; Järvenpää, 2007). Younger CFO’s on the
other hand, will have entered the profession more recently, and therefore have
a greater chance of being familiar with contemporary MAS environments
during their education.
The arguments that support the expectation that younger CFO’s will be
more likely to adopt innovative MAS systems than older CFO’s, transfer to
another demographic variable: organizational tenure. Many studies that have
found a negative effect of manager age on firm innovation and change have
also found a negative effect of managers’ tenure in the organization (e.g.
Wiersema and Bantel, 1992; Boeker, 1997; Young, et al., 2001). Thus,
managers who have spent a substantial part of their career in organizations are
likely to have developed a power basis, social networks and work routines that
they do not want to put at risk, even if they believed that innovation and
change would be in the interest of the organization (Wiersema and Bantel,
1992; Finkelstein and Hambrick, 1996; Young, et al., 2001).
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Concerning educational background, we distinguish between CFO’s
whose education has been primarily business administration oriented (e.g.
accounting, management, finance) and CFO’s who have an operational
background (e.g. in medicine, nursing or pharmacy). Although most CFO’s
will have received at least some education in the fields of accounting and
finance, they will differ with regard to the extent to which their educational
career has prepared them for operational work. This is particularly true in
hospitals, where some CFO’s have primarily been trained to provide
healthcare and have later made a career switch, while others are graduates
from business schools who lack clinical knowledge (Hunter 1992, Buchanan
et al. 1997). We expect CFO’s with a more business-oriented background to
be more familiar with MAS techniques and more open to changing existing
systems than CFO’s whose experience contains a dominant operational
background (e.g. in medicine, nursing or pharmacy). This is in line with
substantial evidence from the Upper Echelon literature, which suggests that
the educational background of managers affects their decision processes
(Wiersema and Bantel, 1992; Finkelstein and Hambrick, 1996) and with the
results of Emsley et al (2006) who show that management accountants’
professional development is associated with the degree to which they initiate
accounting innovations.
Although our theory thus strongly points towards possible effects of
CFO age, tenure and educational background on MAS innovation, empirical
examination of these effects is needed. Not only is the existing evidence with
regard to the effects of manager demographics on MAS development very
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limited (c.f. Naranjo-Gil and Hartmann 2006), the finding that the
characteristics of a single individual manager are predictive of firm outcomes
would also shed new light on existing theories that view MAS innovation as
the outcome of a relatively rational decision-making process. It should also be
recognized that while our theory points to a specific direction in which age,
tenure and educational background affect innovation, we cannot exclude that
these factors may also impact innovation in different ways.
Reflecting the discussion above, we test the following hypotheses:
H3a: Organizations that have a relatively young CFO will make more
extensive use of innovative MAS.
H3b: Organizations that have a relatively short tenured CFO will make
more extensive use of innovative MAS.
H3c: Organizations that have a CFO with a relatively business-oriented
educational background will make more extensive use of innovative
MAS.
Interaction effects
We also predict that CFO characteristics will moderate the effects of strategy
and historical performance on the use of innovative MAS. Thus, the
arguments specified above lead us to expect that CFO’s who are older, more
tenured and have a non-business background are not only less innovative per
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se, but are also less likely to recognize and act upon the need for innovative
MAS resulting from their hospitals’ strategy and lagging performance.
This prediction reflects substantial recent evidence from the Upper
Echelon literature that interactions between organizational and environmental
contingencies and top manager characteristics affect organizational outcomes,
including innovation (Carpenter et al. 2004; Hodgkinson and Sparrow, 2002;
Finkelstein and Hambrick, 1996). According to Carpenter et al. (2004, p. 764)
‘[…] the understanding of such contingencies is perhaps the greatest advance
in UE [Upper Echelon] theorizing and application’. For example, Hoffman
and Hegarty (1993) found that the effect of top manager characteristics on
administrative innovation depends on organizations’ socio-cultural
environment. Similarly, the results of, for example, Thomas and Rhamaswamy
(1997), Keck (1997) and Carpenter (2002) suggest that demographic top
management team characteristics’ effects on organizational performance
depend on the strategy pursued.
First, it is hypothesized here that CFO characteristics moderate the
effect of strategy on MAS innovation. Thus, while a prospector strategy
reinforces the need for innovative MAS, younger, less tenured and relatively
business-oriented CFO’s are more likely to see this need and to translate a
proactive strategy into the adoption of advanced MAS. The positive
association between having a prospector-type strategy and the use of
innovative MAS will therefore be more pronounced for organizations with
relatively young, short tenured and business-oriented CFO’s.
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Older and more tenured CFO’s are less likely to see administrative
innovation as an answer to challenges posed by the business environment.
Instead, they will look for ways to support their organizational strategy in
ways that fit their personal knowledge and do not require much effort to learn
and implement (Bantel and Jackson, 1989; Young et al. 2001). Like CFO’s
with a non-business background (e.g. doctors), they are more likely to
perceive systems such as ABC and BSC as fads and fashions (cf. Abrahamson,
1991; Malmi, 1999) developed by outsiders who lack relevant knowledge of
everyday practice, than as innovative solutions satisfying their organizations’
strategic needs (Boeker, 1997; Finkelstein and Hambrick 1996; Lapsley, 2001;
Jacobs, 2005).
Second, CFO age, tenure and educational background are also likely to
moderate the effect of historical performance on innovation. Thus, the extent
to which the innovation stimulus provided by lagging performance results in
the actual adoption and use of innovative MAS will be less in organizations
with older, more tenured and less business-oriented CFO’s. Higher age and
longer tenure lead managers to look for performance increasing action plans
that do not affect the present status quo and organizational routines (Bantel
and Jackson, 1989; Boeker, 1997). Additionally, older and relatively tenured
managers are less likely to have detailed knowledge about advanced
management techniques and innovative MAS and are less likely to believe that
such innovations are useful (Young et al. 2001). Concerning their own role in
increasing the performance of the organization, older and more tenured CFO’s
might perceive this to be limited. Instead, they might see themselves as
22
independent scorecard keepers whose task is merely to keep track of the
results of other managers’ actions (Hopper, 1980; Pierce and O’Dea, 2003).
Finally, CFO’s with a strong background in the medical profession will focus
more on operational process change than on information system innovation to
battle performance downturn and will also be more skeptical about the
usefulness of innovative MAS (Jacobs, 2005; Jones and Dewing, 1997).
CFO’s with a business-oriented background on the other hand, will be more
receptive for institutional pressures to adopt ABC, BSC and Benchmarking as
their knowledge of these systems will make the apparent solutions that they
offer more salient. These arguments lead to the following two hypotheses:
H4: The positive effect of a prospector strategy on the use of innovative
MAS is more pronounced for organizations with younger, less tenured
and more business-oriented CFO’s.
H5: The negative effect of historical performance on the use of innovative
MAS is more pronounced for organizations with younger, less tenured
and more business-oriented CFO’s.
Figure 1 summarizes all hypothesized relationships.
--- INSERT FIGURE 1 ABOUT HERE ---
23
3. Research method
Our hypotheses are tested using data from the public hospital sector in Spain.
The public sector is undergoing rapid change in its management (accounting)
practices to become more efficient and to be able to deliver higher quality
services (Aidemark, 2001; Lapsley and Oldfield, 2001). As in many other
European countries (Hyvönen and Järvinen 2006, Desombre et al., 2006), the
modernization of the healthcare sector in Spain has been stimulated by
institutional pressure from the government. In 1999, the regional Spanish
health care authorities launched a campaign to encourage hospitals to adopt
and implement new management accounting and information systems,
including ABC, benchmarking and balanced scorecard performance
measurement systems (Del Llano et al., 2000; Meneu et al., 2005). This
campaign involved publications and presentations about innovative accounting
and performance management techniques as well as the provision of resources
to hospitals to fund the upgrading of their systems. However, the choice to
actually adopt and implement innovative MAS was ultimately left to the
hospitals’ management boards.
At the start of the government campaign, the diffusion of innovative
MAS over the Spanish hospital sector was still in its initial phase (cf. Malmi,
1999), and ABC, BSC and benchmarking were practically non-existent.
However, as a result of the campaign the diffusion process took off and the
implementation of innovative MAS increased rapidly. Three years after the
start of the campaign the use of innovative MAS was considerable. However,
there was also much variation in the extent of use of these systems by the
24
hospitals. Thus, while some hospitals responded to the institutional pressure
by implementing new systems throughout their organization, others continued
to rely on their traditional systems. This setting provides an excellent
opportunity to test our hypotheses about the antecedents of MAS innovation
(cf. Aidemark, 2001; Pettersen, 2001).
The dataset that we use contains both survey and archival data. We
used a questionnaire survey to collect information on hospitals’ strategic
positioning, CFO characteristics and use of innovative MAS. Past
performance was measured using operational performance data, acquired from
the Spanish health care authorities (cf. Insalud, 2004). The questionnaire was
designed and administrated in accordance with the guidelines of Dillman’s
(2000) Tailored Design Method and was sent to the board members of all 218
public hospitals in Spain. The questionnaire was sent in 2002, three years after
the start of the government health care reform campaign. To test our
hypotheses, we rely on the data from questionnaires returned by hospital
CFO’s only. Of the 218 questionnaires addressed to CFO’s, 117 were
returned, providing a satisfactory response rate of 53.67 percent. Eight
questionnaires contained a substantial amount of missing data, and were
disregarded for further analysis. Another eleven questionnaires were filled in
by CFO’s with tenure of less than three years, indicating that they had not
been in their position at the start of the government campaign. We also chose
to disregard these questionnaires for further analysis, to ensure that the CFO’s
in our study are the same ones who have decided about the adoption of new
MAS in their hospitals. Accordingly, we test our hypotheses using data from a
25
final sample of 98 CFO’s (44.95 percent) with at least three years of tenure.
To test for potential non-response bias, we compared survey respondents with
the original mailing list and compared the answers provided by early and late
respondents (Tomaksovic-Devey, et al., 1994). Chi-square tests and
independent-samples t-tests did not reveal any indication of non-response bias.
Before developing the questionnaire, we conducted 18 interviews with
managers in four hospitals to enrich our knowledge of the institutional setting
and the diffusion of different management accounting techniques within the
industry. The interviews showed that all managers had at least a basic
understanding of the three innovative MAS techniques that our study focused
on. In addition, the interviews were also used to discuss hospital performance
measurement, to be able to select a representative set of indicators for our
measure of historical performance. The variables in our study were measured
as follows3.
Use of innovative MAS was measured in a similar way as in Chenhall and
Langfield-Smith (1998). Thus, the CFO’s were asked to indicate on a Likert-
Scale from 1 (not at all) to 5 (to a very great extent) to what extent the
following techniques were used in their hospital: the BSC, ABC, and
benchmarking. The three items were modeled to be manifest indicators
reflective of a latent construct called use of innovative MAS.
Measurement of the adoption and use of (innovative) MAS has
provided researchers with difficulties (Chenhall and Langfield-Smith, 1998;
Malmi, 1999; Kennedy and Affleck-Graves, 2001; Ittner et al. 2003). One of
26
the reasons is uncertainty about whether adoption should be considered
dichotomous (i.e. organizations either have or have not adopted a technique),
or should be measured as a continuous variable. We choose to use an ordinal
scale to be able to capture differences in the extent of use of the techniques in
question throughout the hospitals in our sample and to avoid many of the
psychometric problems associated with the simple yes/no question used in
some previous studies. Also, in support of the validity of our instrument, the
interviews held in advance of the survey administration, clearly showed that
hospital managers had a common basic understanding of ABC, the BSC and
benchmarking.
Organizational Strategy was measured with an instrument based on
Miles and Snow’s (1978) typology of strategy, which distinguishes between
prospector and defender organizations. Following Abernethy and Brownell
(1999), managers were presented with the description of two hospitals, a
prospector hospital and a defender hospital. They were asked to indicate their
perception of the hospital’s strategic position three years ago (that is: at the
time the government’s campaign was launched) and at the moment of the
survey on a five-point Likert-type scale anchored by ‘complete defender’ (1)
and ‘complete prospector’ (5). The two items were modelled as reflective
indicators of a construct capturing the organization’s strategy during the
period in which the MAS innovation could have taken place.4
Historical performance was measured using objective performance
data. We acquired operational performance data for the three years before the
survey administration from the Spanish Regional Health Care Services (e.g.
27
Insalud, 2004). To be able to select those performance measures that provide
the best indication of comparative hospital performance, we studied the
healthcare accounting and financial management literatures and discussed
hospital performance measurement in our interviews with the hospital
managers that preceded the actual data collection. Both the literature and the
interviews indicated that non-financial measures of operational performance
are considered to be of crucial importance in hospitals (e.g. Ballou et al. 2003;
Watkins, 2003; Griffith and Alexander 2002). This is especially the case for
the hospitals in our sample, which rely on public funding and for whom
performance is defined in terms in of operational excellence and efficiency,
within the financial boundaries set by the local governments. The choice to
focus on the effects of operational as opposed to financial performance
differences is also supported by the theory of performance measure selection
based on the informativeness principle (Holmström, 1979). This principle
suggests that non-financial measures are better indicators of relevant aspects
of employee performance in organizations that strive for operational
excellence by itself and are not solely or ultimately driven by commercial
objectives (Ittner et al, 1997).
We decided to rely on six non-financial performance indicators:
occupancy rate, use of surgery rooms, re-admission rate, length of stay,
mortality rate and waiting time. These six measures were selected because
they are important performance indicators for all hospitals regardless of their
strategic positioning. As such they are used by healthcare authorities around
the world to compare hospitals’ performance (Jacobs et al., 2005; Roos et. al.
28
1999; Griffith and Alexander 2002; see Van Peursem et al., 1995 for a review
of hospital performance measurement). Table 1 provides a more detailed
description of the six indicators. To obtain a measure of historical
performance, we first calculated the average score of every individual
indicator over the three years, and then modeled the average scores to be
manifest indicators of a latent construct called historical performance.
--- INSERT TABLE 1 ABOUT HERE ---
CFO characteristics were measured as demographics, following the Upper
Echelons tradition (Hambrick and Mason, 1984). Age and tenure refer to the
CFO’s age and tenure in the organization respectively. Regarding educational
background, managers were asked to indicate their educational degrees, both
regular university degrees and postgraduate programs. We translated these into
years of education in one of two directions: business-oriented (e.g. Business,
Economics, Accounting, Law) or operations-oriented (e.g. Medicine, Nursing,
Biology, Chemistry). Then we created the variable educational background as
the ratio of the years of business-oriented education to the total number of
education years.
We included hospital size and care complexity as control variables in
the analysis. Both variables were modeled as antecedents of MAS innovation.
Hospital size was measured as the number of beds (Abernethy and Brownell,
1999). Care complexity was measured using objective data on the hospitals’
Case-Mix Index (Covaleski et al. 1993; Jonge et al. 2001). The Case-Mix
29
Index is an indicator of care complexity according to the average diagnosis-
related group weight5. A score higher than 1 indicates a hospital’s case mix is
more complex than the standard case mix.
4. Results
In line with recent management accounting research (e.g. Abernethy and
Bouwens, 2005; Chenhall, 2005) the hypotheses were analyzed using Partial
Least Squares (PLS Graph 3.0). The assessment of the measurement model in
PLS is comparable with principle components analysis, while the path
coefficients in the PLS structural model are interpretable as β-statistics from
ordinary least squares regression. Table 2 shows the descriptive statistics of
the variables in the model and Table 3 shows the correlations between these
variables. The correlations between strategy, historical performance and CFO
characteristics are generally low. Only the correlation between strategy and
CFO educational background is marginally significant and indicates that more
prospector-oriented hospitals are somewhat more likely to have a CFO with a
business background. The low correlations also suggest no problems exist
with regard to multicollinearity (no correlation exceeds 0.30 in absolute
value). Also, all VIF scores are below 2.5.
The correlation between strategy and care complexity is marginally
significant, indicating the prospector-type hospitals have a somewhat higher
case-mix index, which is consistent with prior research (Nath and Sudharshan
1994).
30
Table 4 shows the frequencies of the answers on our three items
measuring the use of innovative MAS. The figures in this table confirm that at
the moment of the survey the majority of the organizations in our sample had
started to innovate their MAS. The percentage of organizations indicating that
they were using the innovative systems to a (very) great extent was still
limited though, as can be expected three years after the start of the government
campaign. The use of Benchmarking and the Balanced Scorecard was
somewhat more widespread than the use of ABC.
The analysis of the measurement model confirms the
unidimensionality of the variables, with all loadings of manifest variables on
latent variables exceeding 0.70 and most being substantially higher. In
addition, internal reliability for the three constructs in our model (use of
innovative MAS, historical performance and strategy) was satisfactory with
the composite reliability measure reported by PLS on default exceeding 0.8 in
all three cases6. In addition, the Average Variance Extracted (AVE) was
higher than 0.5 in all cases, also indicating appropriate internal reliability (cf.
Hulland, 1999). To assess the discriminant validity, we compared the
constructs’ AVE’s with the squared correlations between variables (Chin,
1998; Hulland, 1999). Results showed that discriminant validity was also
satisfactory, as in all cases the AVE was higher than the squared correlation.
Table 5 reports the loadings of items on their respective constructs and the
constructs’ composite reliability and AVE.
--- INSERT TABLES 2, 3, 4 AND 5 ABOUT HERE ---
31
Figure 2 displays the PLS model tested. To calculate the interaction terms we
followed the procedure recommended by Chin et al. (2003). So we first
standardized the item scores and then calculated the interaction terms as the
product of the standardized item scores. Table 6 contains the detailed output
statistics of the analysis of the structural model and reports on the significance
of the standardized ßs that resulted from this analysis, based on a
bootstrapping procedure that used 500 samples with replacement. This table
also reports the R-squared statistic for the dependent variable7. In analyzing
our results with PLS we followed a hierarchical procedure in which we first
ran the model with main effects only (panel A) after which we analyzed the
full model including the interaction terms (Panel B).
--- INSERT TABLE 6 ABOUT HERE ---
--- INSERT FIGURE 2 ABOUT HERE ---
The results in panel A of Table 6 support H1, since the path coefficient from
strategy to innovative MAS use is positive and significant (0.219; p = 0.024).
There is marginal support for H2 as the path from historical performance to
innovative MAS use is negative and significant at the 10 percent level (-0.188,
p = 0.078). Regarding CFO characteristics, there is strong support for H3a,
H3b and H3c. The results show that CFO age (-0.232; p = 0.031) and tenure (-
0.204; p = 0.046) have a significantly negative effect on the use of innovative
32
MAS, while educational background has a significantly positive effect (0.226;
p = 0.034), as expected.
Considering the interaction hypotheses, support is mixed. First, as is
clear from panel B of Table 6, our results do support H4. Age and tenure
interact with strategy to produce significant effects on innovative MAS use (-
0.208; p = 0.026 for age and -0.226; p = 0.07 for tenure). In addition,
educational background has a significantly positive interaction effect with
strategy (0.204; p = 0.029), indicating that the effect of a having a more
prospector-oriented strategy on the use of innovative MAS is stronger for
hospitals that have a more business-oriented CFO. Considering H5, however,
none of the interactions between historical performance and CFO
characteristics are significant at a 5% level of significance (the interaction
between historical performance and educational background is marginally
significant and positive, ß = 0.182, p = 0.081).
In summary, the findings indicate that strategy affects the adoption and
use of innovative MAS and that this effect is moderated by the characteristics
of CFO. While on average more prospector-oriented hospitals are more likely
to use innovative MAS, this effect of strategy is more salient for hospitals with
younger, less tenured CFO’s and hospitals with a CFO with a business
education. Also, there is some indication that lagging performance increases
MAS innovation. Not much evidence exists with regard to CFO characteristics
moderating this effect. Finally, the CFO characteristics age, tenure and
educational background also affect MAS innovation directly.
33
To see how much predictive value the interaction terms add to the
model, we compared the R2 from the model with interactions with the R2 from
the main effects model. The path coefficients, their significance and the R2 for
this model are presented in panel b of table 5. The additive explanatory power
of the interaction model was determined by calculating Cohen’s f2effect size
measure (Cohen, 1988; Chin, et al., 2003, p.211)8. Results show that the
interaction constructs have a total effect size f of 0.200, which indicates that
inclusion of the interaction terms does considerably improve the explanatory
power of the model.
5. Discussion and conclusion
This paper set out to increase our understanding of why some organizations
are more likely to implement newly developed management accounting
techniques than others. We predicted that the use of innovative MAS would be
influenced by both the inherent organizational need for more advanced
accounting systems and the willingness and ability of the CFO to recognize
this need and initiate administrative change. In support of our hypotheses we
found evidence that two factors we believed reflect the need for innovative
MAS, strategy and historical performance, influenced organizations’ use of
these systems. Furthermore, we found that our hypotheses that younger, less
tenured and more business-oriented CFO’s would be more likely to adopt
innovative systems were confirmed. In addition, we found evidence that the
extent to which strategic positioning influences innovation was moderated by
34
CFO characteristics. Evidence for the hypothesized interaction between
historical performance and CFO characteristics was limited.
The findings of this study contribute to the management accounting
and the general management literature (e.g. the Upper Echelon perspective) as
indicated in the introduction section. Thus, we extend the literature on
management accounting innovation and change by showing that adoption
decisions are not only a function of the outcome of a rational decision-making
process and institutional pressures (cf. Malmi, 1999; Reid and Smith, 2000)
but also crucially depend on the characteristics of the individuals ultimately
responsible for such decisions. Also, our study contributes to a growing
literature on the roles and orientations of financial managers (Emsley, 2005;
Pierce and O’Dea, 2003; Burns and Baldvinsdottir, 2005; Järvenpää, 2007;
Byrne and Pierce, 2007). We show that some CFO’s are more likely to change
their organizations’ accounting systems than others and that demographic data
is predictive of CFO’s innovativeness.
Another contribution of our paper is that we provide evidence for
strategy and performance as antecedents instead of outcomes of MAS design
and use. Consequently, out study adds to a more comprehensive view of
organizational contingencies (such as strategy), MAS design, top manager
characteristics and performance as dynamic powers that influence each other
over time. Finally, this study answers calls in the literature to focus on
management accounting innovations in the public sector (Pettersen, 2001;
Cavalluzzo and Ittner, 2003; Lapsley and Wright, 2004).
35
Our paper contributes to the Upper Echelon literature by confirming
that top manager characteristics are predictive of administrative innovation
(Wiersema and Bantel, 1992; Young et al., 2001). Furthermore, our results
highlight that students of the effects of top management team characteristics
should not only look for direct effects but should also investigate how
manager characteristics interact with situational contingencies in shaping
organizational outcomes (cf. Carpenter et al., 2004).
In interpreting the results of this study, its limitations should be taken
into account. Some of these limitations are inherent to the survey method, such
as the use of perceptual measures and the potential for common-method bias.
By closely following the guidelines of Dillman (2001) however, we have tried
to limit these problems as far as possible. Also, we relied on more objective
data where such data was available. One specific limitation is that we were
forced to focus our investigation on a limited number of management
accounting innovations (ABC, BSC, and Benchmarking). While these
innovations were intended to serve as indicators of a broader construct,
overlooked idiosyncrasies might render them less appropriate as proxies for
innovative MAS adoption in general (cf. Chenhall and Langfield-Smith,
1998). Also, in measuring our dependent variable, we relied on a survey with
Likert scale type questions. Although we believe that our measure of the use
of innovative MAS provides an improvement from the existing literature, it is
still a perceptual measure and objective data might have provided a more
reliable indicator of innovation. Unfortunately, such data were unavailable.
36
A final limitation of our study is that we only investigated a small
group of MAS innovation antecedents, while other factors, such as
organizational structure (Gosselin, 1997; Abernethy and Bouwens, 2005) and
technical difficulties (Cavalluzzo and Ittner, 2003) might also impact
innovation adoption. In sum, despite our belief that this study provides some
valuable insights, future research is needed to confirm our findings in different
settings and using different methods and to examine other antecedent variables
to add to a more comprehensive view of MAS innovation.
1
We further elaborate on how this study fits within existing research on MAS and strategy in
the hypothesis development section.
2
Spanish hospitals are required to report several financial and non-financial indicators that
cover the use of resources, productivity and health care performance. These indicators are
integrated in a system, known as INIHOS (‘INformation Inter HOSpitales’), which provides
indicators used for measuring, comparing and evaluating health care performance among
hospitals.
3
A more detailed description of the survey items is found in the appendix
4
Note that asking respondents about their organization’s strategy in the period in advance of
the survey allows us to express with more certainty that strategy is indeed an antecedent of
MAS rather than the consequence. In this sense, it allows us to address the recursive
relationship between strategy and MAS design (Langfield-Smith, 1997).
5
The Diagnosis-Related Group (DRG) refers to a system to classify hospital activities into
one of approximately 500 groups expected to have similar hospital resource use. DRG
categories, which reflect the nature and intensity of the hospital services, can essentially be
thought of as the hospitals ‘‘products.’’ (Preston, 1992; Pizzini, 2006, p. 183).
6
This composite reliability measure is interpretable as Cronbach’s alpha (see Fornell and
Larcker, 1981).
7
The control variable size did not have a significant effect on the use of innovative MAS.
Care complexity is significantly associated with the use of innovative MAS (ß = 0.218; p =
0.017).
8 2
f = (R2 interaction model – R2 main model)/(1- R2 main model). Interaction effect sizes are
small if 0.02, medium if 0.15, and large if 0.35 (Chin et al., 2003).
37
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Tables and Figures
Table 1. List of indicators used to measure historical performance
Name Definition Description
Occupancy rate (use of Daily census / Number of Number of inpatients receiving care
beds) hospital beds each day at hospitals’ beds as a
fraction of total capacity.
Use of surgery rooms Hours used at surgery room Use of surgery facilities (equipment)
/ Hours available at surgery at hospitals as a fraction of capacity.
room
Re-admission ratea Returned admitted patients Percentage of admitted patients who

/ Total Patients discharge return to the hospital within seven
days of discharge.
Length of Staya Number of inpatient days / Average duration of patient stay in

Number of admissions hospital.
Mortality ratea Total Patients Deaths / Total Proportion of the patients at a hospital
Patients Admission that died within 60 days of hospital
admission.
Waiting timea Total number of days waited The time which elapses between the
/ Outpatient activity request by a general practitioner for an
appointment and the attendance of the
patient at the outpatients’ department
a
Reverse coded
Table 2. Descriptive statistics for variables (n=98)
Variable Mean SD Theoretical Range Actual Range
1. Strategy 3.08 0.42 1.00-5.00 1.00-5.00
2. Historical performance 0.57 0.06 0.00-1.00 0.52-0.74
3. Age 43.3 3.4 --- 34-48
4. Tenure 4.1 1.8 --- 3-12
5. Educational background 0.67 0.05 0.00-1.00 0.54-0.93
6. Innovative MAS 2.93 0.35 1.00-5.00 1.00-4.00
7. Care Complexity (CMI) 1.57 0.16 --- 0.93-1.61
8. Size 336.18 109.27 --- 190-1230
47
Table 3. Correlations from PLS model (n=98)
Variable 1 2 3 4 5 6 7
1. Strategy 1.000
2. Historical performance 0.161 1.000
3. Age 0.164 0.076 1.000
4. Tenure 0.129 0.069 0.107 1.000
c
5. Education 0.190 0.157 0.152 0.168 1.000
a c a b
6. Innovative MAS 0.228 -0.187 -0.246 -0.214 0.197b 1.000
c
7. Care Complexity (Case-mix) 0.193 0.142 0.082 0.103 0.159 0.201b 1.000
8. Size 0.154 0.116 0.056 0.127 0.088 0.162 0.149
a b c
Significant at 0.01 level (two-tailed) Significant at 0.05 level (two-tailed) Significant at 0.1 level (two-tailed)
48
Table 4. Actual percentages for MAS innovation response scale (n=98)
Use Technique
Benchmarking ABC BSC
Not at all 10% 31% 19%
To a small extent 35% 49% 33%
To a moderate extent 46% 19% 42%
To a great extent 9% 1% 6%
To a very great extent 0% 0% 0%
49
Table 5. Reliability and validity analysis of multi-item constructs (n=98)
Variable CRa AVEb Item Loading
Adoption of innovative MAS 0.802 0.546 Balanced scorecard 0.707

ABC 0.720
Benchmarking 0.702
Historical Performance 0.829 0.580 Occupancy rate 0.794

Surgery rooms use 0.818
c
Re-admission rate 0.771
c
Length of stay 0.800
c
Mortality rate 0.815
c
Waiting time 0.791
Strategy 0.816 0.551 Strategy (3 years ago) 0.736

Strategy (currently) 0.782
a b c
Composite Reliability Average Variance Extracted reverse scored item
50
Table 6. Results from PLS analysis (path coefficients, n=98)
A. Main effects only model

To: Innovative MAS use
From: Path coefficient P value
Strategy 0.219 0.024
Historical performance -0.188 0.078
Age -0.232 0.031
Tenure -0.204 0.046
Education 0.226 0.034
Care Complexity (Case-Mix) 0.207 0.039
Size 0.121 0.142
2
R = 0.136
B. Full model
To: Innovative MAS use
From: Path coefficient P value
Strategy 0.228 0.004
Historical performance -0.191 0.072
Age -0.251 0.001
Tenure -0.216 0.021
Education 0.232 0.003
Strategy x age -0.208 0.026
Strategy x tenure -0.226 0.007
Strategy x education 0.204 0.029
Historical performance x age 0.147 0.131
Historical performance x tenure 0.156 0.122
Historical performance x education 0.182 0.081
Care Complexity (Case-Mix) 0.218 0.017
Size 0.124 0.139
2
R = 0.309
51
Figure 1: Research model
Strategy
CFO Characteristics: Use of

• Age innovative
• Tenure MAS
• Education
Historical performance
52
Figure 2. Results PLS structural analysis full model
Historical
performance x tenure
Historical Historical performance

performance x age x education
Care Complexity
0.156
0.218b 0.182c
Historical 0.147
performance
- 0.191c
Strategy 0.228a
Innovative MAS use
R2=0.309
-0.251a
Age
-0.216b
Tenure
0.232a
0.204b
0.124 -0.208b
Education
-0.226b
Strategy x
Strategy x education
Size age
Strategy x
tenure
a Significant at the 0.01 level

b Significant at the 0.05 level
c Significant at the 0.1 level
53
APPENDIX– Questionnaire items
1. Organizational strategy
The following two descriptions of hospitals were given to respondents. They were
asked to circle on five-point Likert-type scales where they would place their hospital
three years ago and where they would place it currently.
‘Hospital A offers a relatively stable set of services and tends to focus on a

particular segment of the population and offers a more limited range of services
than other hospitals of the same categories. Generally Hospital A is not at the
forefront of new services developments in health care. Developments in services
tend to concentrate on current areas of operation. It believes that doing the best job
possible in its existing range of services and refining existing services are of utmost
importance.’
‘Hospital B makes relatively frequent changes in, and additions to, its set of services
and tends to offer a wider range of medical services compared to other hospitals of
the same categories. Hospital B responds rapidly to early signals of market needs or
opportunities and it consistently attempts to be at the forefront of new service
developments. Other hospitals often follow Hospital B in the development of these
services. This type of hospital may not maintain its strength in all of the areas it
enters.’
2. Use of innovative MAS

Respondents were asked to indicate on a five point Likert scale to what extent (not
at all – to a very great extent) the following management accounting techniques
were used throughout their hospital:
• Balanced Scorecard
• Activity Based Costing
• Benchmarking
54
3. CFO characteristics
• Age
• Tenure in organization
• University degree and title
• Years of health care postgraduate education (e.g. seminars, special courses on
clinical issues)
• Years of business administration postgraduate education (e.g. seminars, special
courses, MBA)
55

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How CFO’s determine management accounting

innovation: An examination of direct and indirect

David Naranjo-Gil – Pablo de Olavide University, Sevilla, Spain

Victor S. Maas – University of Amsterdam, Amsterdam Business School,

Frank G.H. Hartmann – RSM Erasmus University

David Naranjo-Gil, Pablo de Olavide University,

Electronic copy available at: http://ssrn.com/abstract=1296723

Although management accounting innovations such as Activity-Based

Costing, the Balanced Scorecard and benchmarking have received much

academic interest in recent years, our understanding of why some

organizations adopt and implement such new management accounting systems

literature by examining the role of the CFO in MAS innovation. We

hypothesize that individual differences between CFO’s are predictive of

organizations’ use of innovative MAS. In addition, we propose that CFO

characteristics moderate the extent to which organizations rationally adapt to

(environmental) contingencies. To examine this second prediction we compare

the effects of strategy and historical performance on the adoption of

healthcare sector in Spain. Our results are generally supportive of our

Keywords: Management Accounting Innovation, Strategy, Historical

Performance, CFO Age, CFO Tenure, CFO Education.

Electronic copy available at: http://ssrn.com/abstract=1296723

Increasing levels of competition and technological change have focused the

attention of practitioners and academic researchers on management accounting

system (MAS) innovation. Following the critique that management accounting

support the development and implementation of organizations’ strategic

policies. Whereas these techniques are deemed increasingly important for

management accounting innovations still varies widely across organizations

technical superiority (Gosselin, 1997; Fullerton and McWatters, 2004).

Several management accounting studies have tried to explain this

phenomenon. Many of these have relied on a contingency perspective to

explain innovation adoption decisions and subsequent implementation

2004). These studies argue that organizational and environmental

contingencies determine the degree to which organizations will benefit from

implementing innovative MAS and (implicitly) assume that the decision to

(Chenhall, 2003; Tillema, 2005). Other researchers, however, stress that

rational adaptation to environmental circumstances cannot fully explain

2000; Hyvönen and Järvinen, 2006)

In this study we explore one such latter factor, as we focus on the

characteristics of the organization’s Chief Financial Officer (CFO) to explain

management accounting innovation. Although the general management

literature widely acknowledges that top manager characteristics are predictive

of organizational outcomes (e.g. Finkelstein and Hambrick, 1996), little is

known about how individual managerial differences affect accounting and

focusing on CFO’s age, tenure and educational background.

We examine both the direct effects of these CFO characteristics on

historical performance on innovation. These latter two factors are identified as

important drivers of organizations’ need for innovation in the wider literature

(e.g., Bolton, 1993; Chenhall and Langfield-Smith, 1998). In summary, this

paper aims to provide a more comprehensive view of management accounting

innovation by simultaneously looking at organizational factors that determine

organizations’ ability and willingness to actually initiate and implement

managers impact the design and use of management accounting systems.

composition affects the use of management accounting in strategy

implementation and strategic change (Naranjo-Gil and Hartmann, 2006,

CFO) and strategic position drive MAS innovation1.

Our study contributes to the existing management accounting literature

in a number of ways. First, we provide evidence that our understanding of

MAS innovation can be increased by simultaneously investigating factors that

provide organizations with an incentive for innovation and factors that

determine organizations’ ability and willingness to change. In addition, our

study suggests innovation is at least partly explained by the interaction of

stream of research on the roles of management accountants and financial

managers in organizations (Byrne and Pierce, 2007; Burns and Baldvinsdottir,