Examining an expanded repertoire of finance functions: effects on performance and the moderating role of environmental uncertainty

Abstract

The literature recognises that the activities of contemporary finance functions are expanding. Guided by the competing values framework, we group the results of previous research into four roles performed by modern finance functions – collaboration, adhocracy, control, and compete. We examine whether finance functions that encompass all four roles have an improved ability to match the right role with the corresponding organisational demand and then test whether this leads to improved financial performance. Empirically, we use structural equation modelling to analyse data from 408 firms operating in Denmark’s manufacturing and services sectors. The results show that fulfilling multiple finance roles is positively related to the ability to assist an organisation with the right activities at the right time and with the right quality. This ability to differentiate behaviour is also positively associated with a return on invested capital and, further, environmental uncertainty positively moderates this effect. The statistical results provide evidence that cultivating multiple roles within the finance function can create value and higher degrees of uncertainty positively leverage this value.

Keywords:

• roles of finance functions
• role broadness of finance functions
• usefulness of diverse finance function roles
• objective financial return
• environmental uncertainty

Acknowledgement

The authors would like to thank editor Sven Modell as well as the two anonymous reviewers for their insightful comments throughout the review process.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental data

Supplemental data for this article can be accessed https://doi.org/10.1080/00014788.2023.2267443.

Notes

1 Perceived usefulness of the finance function can be gauged as finance function effectively support an organisation with the right roles at the right time and quality. Thus, perceived usefulness is increased when closing the gap between demand and supply of finance function roles.

2 The concept of broadness of the finance function roles is inspired by Carmeli and Halevi’s (2009) concept of behavioural repertoire and refer to ‘the portfolio of roles that the finance function can perform’, and ‘the ability to perform roles differently, depending on the organisational situation’, i.e. to effectively support an organisation at the right time with the right roles.

3 Using the terminology from Luft and Shields (2003), the moderation relationship in Figure 2 (H3) is a ‘Moderator-variable interaction’ as opposed to an ‘Independent-variable interaction’. Here, we use the interaction model in panel D (‘Moderator-variable interaction’) and not the one in panel C (‘Independent-variable interaction’) on p.174 in Luft and Shields (2003). The difference between these is whether the moderator variable is expected to be related to the dependent variables. In our case, the dependent variable is financial performance, and by definition contingency variables, i.e. uncertainty, are not related to performance.

4 One modification index was greater than 10, suggesting a correlation between the residuals of items 2 and 3 of the adhocracy role factor. Byrne (2010) states that a correlation between residuals in a measurement model should be performed only when it has substantial meaning. Both items represent a strategic orientation. Therefore, we correlated the residuals of items 2 and 3 of the adhocracy role.

5 We also run a chi-square difference test between the first order and the second order measurement models. A nested second order model cannot fit the data better than it’s first-order model (Marsh and Hocevar 1985), but it can of course fit worse. Chi-square difference is not significant (p = 0.40) (chi-square difference: 1.8, degrees of freedom difference 2, see table 6).

6 We also test whether there is a direct effect from role broadness to ROIC. The relation is not significant (p = 0.676, std. β = 0.024). Additionally, we test whether environmental uncertainty moderates the relationship via subgroup analysis (low and high environmental uncertainty). The relationship between role broadness and financial performance is not significant in the low group (p = 0.364, std. β = 0.106) nor in the high group (p = 0.509, std. β = 0.082).

7 We cannot test this using a conventional regression analysis involving an interaction term, because our model involves latent constructs. Moreover, an interaction term in a regression analysis consisting of the moderator variable and the independent variable does not assume per se that the moderator variable is directly unrelated to the dependent variable; if the independent variable is constant, then changes in the moderator variable can be mathematically expected to change the dependent variable. This is appropriate in an independent-variable moderation, but not in the moderation-variable interaction that we use.

8 Before testing the differences in the structural relations, we must ensure that the measurement model is invariant across the subgroups (Deng et al. 2005). We employ a χ² difference test to compare a model without structural parameters restricting all first-order and second-order factor loadings as equal across subgroups with a model where all loadings vary freely across subgroups. The test reveals that the measurement model is invariant across subgroups.

9 We thank one of the reviewers for suggesting testing indirect effects and for suggesting the moderated mediation test.