Partial Least Squares Structural Equation Modeling

Researchers across a wide range of disciplines exploited the capabilities of partial least squares structural equation modeling (PLS-SEM). The rise in popularity of PLS-SEM is particularly noticeable 2013 onwards. The banking and finance discipline, however, hardly exploits the advantages of the PLS-SEM approach. PLS-SEM can be used for prediction and exploration in complex models with relaxed expectations on data. PLS-SEM is useful in identifying relationships between constructs. If the primary objective is theory development, PLS-SEM is appropriate.

During the Global Financial Crisis (GFC) of 2007–2009, even banks in industrial economies with long established markets suffered significantly. This highlights, weaknesses in the banking system and the importance of a sound banking sector. This paper applies Partial Least Squares Structural Equation Modeling (PLS-SEM) to explain the drivers of bank soundness in the G7 countries during the period 2003–2013. PLS-SEM models are able to handle latent variables and complex models, and thus, PLS-SEM is suitable for this study. In creating a parsimonious model, the study assembles 17 manifest variables of six constructs as the direct cause and eight constructs as the indirect cause of bank soundness. The structural equation model comprises of six latent exogenous constructs [Capital (C), Asset (A), Management (M), Earnings (E), Liquidity (L) and Sensitivity (S)] which explains the observed consequences of bank soundness in these countries. Results indicate that CAMELS constructs are able to explain 32.5% of the variation in banks’ soundness. The model’s predictive relevance (Q ² ) in regards to endogenous construct stands at a medium category of 0.315. The results imply that banks placed high importance on off-balance sheet and capital activities, and thus, taking on higher risk. Surprisingly, banks were also operating at low levels of capital and liquidity, resembling banks that failed during the Great Depression of the 1930s. The weakness in capital and liquidity measures shows the need for policy makers to have a better understanding of sound banking, before quantifying measures and creating policies that makes banks’ less prone to crises episodes and create convergence with soundness.

Building and maintaining successful, long-term relationships is one of the crucial tasks in today’s financial sector, the idea being that loyal customers purchase more, demonstrate a higher willingness to spend, and act as advocates for the company. However, there is also some controversy on whether profitability indeed increases with customer loyalty. We will analyze the process of loyalty development and evaluate if and how customer loyalty (positively) affects profitability. We will do so with reference to a four stage sequential loyalty model that grounds on a chain of effects from cognitive loyalty, affective loyalty, conative loyalty to action loyalty. We will make use of PLS structural equation modeling and analyze data of almost 7000 customers of a German bank surveyed by telephone. These analyses will support practitioners in the banking and financial sector in setting-up and steering their customer retention strategies and will provide a theoretical contribution to validating one of the most prominent customer loyalty models.

Having a strong reputation is a desirable resource for banks which must face today’s competitive business environment. This chapter aims to (1) investigate the contribution of service quality and relationship investment to building a good reputation and (2) show that the efforts made by banks in maintaining customer relationships ultimately translate into positive outcomes, such as relationship loyalty. Data collected from banking services consumers from two countries were analysed using partial least squares (PLS). Based on 510 responses from Romanian consumers and 525 responses from UK consumers, the proposed framework is tested separately and causal relationships are then compared to examine whether path estimates are invariant across the two countries. Finally, the data is pooled to increase the generalizability of results. Perceptions of both service quality and relationship investment have a significant contribution to building sympathy towards banks and in developing favourable perceptions about their competence. Furthermore, perceived relationship investment acts as a mediator in the relationship between overall service quality and corporate reputation. Finally, this study reinforces the importance of perceived relationship investment and corporate reputation in developing long-lasting relationships by demonstrating the willingness of customers to reciprocate. The findings extend previous knowledge in the field by emphasising the importance of perceived relationship investment in building customers’ sympathy towards service companies as well as favourable perceptions regarding their competence. In addition, the framework herein proposed acknowledges the mediating role of perceived relationship investment between service quality perceptions and corporate reputation. Furthermore, the study builds on signalling and social exchange theories to show that banks’ endeavour to increase their customers’ quality perceptions enhance the benefits of banking institutions. Altogether, results reported in this study are of high relevance from both a theoretical and managerial perspective. Future studies may test the proposed framework in other cultures and explore the mediating role of perceived relationship investment between other factors and corporate reputation. Despite the interest in the two concepts of corporate reputation and perceived relationship investment in either the relationship marketing literature or the corporate reputation literature, the relationship between the two constructs has been only theoretically suggested. Against this background, this chapter is the first to investigate empirically the impact of perceived relationship investment on corporate reputation. It is also the first to assess the potential role of perceived relationship investment in mediating the effect of service quality on corporate reputation.

The Compliance Index Model represents a new type of employee-based measurement system for evaluating—and enhancing—the effectiveness of compliance programs. The authors discuss the nature and purpose of the Compliance Index Model and explain the theory underlying the model, and the quantitative approach employed to estimate the model parameters. The authors also illustrate the use of importance-performance analysis to identify critical areas of managerial attention and action for improving compliance program effectiveness and, consequently, mitigating compliance risk. Highlights of the findings include that (1) misaligned incentives, role-model-behavior, and transparency are factors that determine overall compliance culture, (2) overall compliance culture determines whistleblower readiness and compliance risk, and (3) compliance culture provides the foundation for compliance program effectiveness. The authors conclude with a discussion of the implications of the Compliance Index Model for public policy makers, managers, customers, as well as finance and banking in general.

This study examines capital structure determinants using a simultaneous causal model with interaction effects between manifest and latent variables. Partial Least Squares (PLS) is an approach to Structural Equation Models (SEM) that allows researchers to analyse the relationships simultaneously. It is interesting to compare and contrast this approach in analysing mediation relationships with the regression analysis. In addition to statistical data, logical arguments are presented supported by two case studies from PLS-SEM and regression models. We find that the choice between regression and PLS-SEM matters even with the simplest scenarios per item for constructs. This study’s originality is the provision of new comparative analyses of PLS-SEM versus regression analysis in the context of capital structure determinants. The “indirect” and “mediate” macro syntax normal theory of the Sobel test, and the bootstrapping techniques are compared with PLS-SEM. We find that the PLS-SEM analysis provides less contradictory results than regression analysis in terms of detecting mediation effects.

In management accounting research, the usefulness of Partial Least Squares-Structural Equation Modelling (PLS-SEM) is commonly underestimated. However, those specific characteristics of PLS-SEM that remain unrecognized in management accounting research appear to be tailor-made for answering a variety of relevant research questions. PLS-SEM is particularly appropriate for management accounting because such research is often conducted at an exploratory stage; the theoretical basis is often weak; archival data or formative measurements are highly relevant; and the predictive orientation of PLS-SEM offers the potential to answer practical questions. Based on three highly ranked published articles in management accounting, I demonstrate how PLS-SEM can be useful in this field. First, Ittner et al. (Account Rev 72:231 -255, 1997) illustrate how accounting research can use archival data in PLS-SEM; second, Hartmann and Maas (Account Business Res 41:439–458, 2011) construct an example of the exploratory use of PLS-SEM in management accounting; and third, Burkert and Lueg (Manage Account Res 24:3–22, 2013) use hierarchical latent construct in PLS-SEM in their management accounting research.