Exploring how an entrepreneur's cognitive style and level of overconfidence influence the development of management accounting systems

Entrepreneurs look to exploit profitable opportunities, however the novice entrepreneur faces many challenges, which can slow growth or even terminate the business. One such challenge is the development of management accounting systems (MAS). Insufficient MAS may restrict business growth, while inadequate MAS can lead to business demise. More recently, it has been argued that many New Economy Firms (NEFs) fail due to the ”lack of proper management control systems” (Granlund and Taipaleenmaki 2005). At the other end of the survival spectrum, entrepreneurs who intend to, and succeed in, growing a business have been found to focus on internal, as well as external, business issues (Jenkins and Johnson 1997). The development of MAS is an internal business issue; therefore the available evidence suggests that the development of MAS is important to entrepreneurial success. Recent MAS organizational life-cycle studies (Davila and Foster 2005; Granlund and Taipaleenmaki 2005), and small business MAS studies, recognize the role of the CEO or the owner-manager in the MAS development process, however none consider the influence of entrepreneurial behavior. This lack of attention to the entrepreneur’s influence on MAS development is recognized by Collier (2005), who provides details of a successful business where MAS development is considered a function of entrepreneurial control. Unlike much of the cited MAS research, many entrepreneurship scholars view the individual entrepreneur as an important focus of study, while others consider insights to entrepreneurial behavior to be critical in understanding business development. Entrepreneurial behavior is considered more predictive of individual variation than personality, with entrepreneurial cognition research receiving considerable attention. Cognition has been found to vary across entrepreneurs in ways that may influence the outcome of their endeavours (Simon, Houghton et al. 2000) and can be viewed in terms of style or bias. Cognitive style is a person’s ”preferred way of gathering, processing and evaluating information” (Allinson, Chell et al. 2000). Two cognitive styles explored in the literature are rational (analytic) and intuitive decision-making. Attention is also being given to the cognitive bias of overconfidence, where individuals ”overestimate the correctness of their initial estimates” (Forbes 2005). In particular situations, overconfidence can increase the likelihood of venture initiation and start-up, however, it can also lead, subsequently, to inappropriate operational decisions and underperformance.