The Effect of Transformational and Transactional Leadership Styles on the Financial Performance of an Organisation

Abstract

In small and medium sized enterprises (SMEs), the leadership style of the top management can newlinehave a strong impact on the performance of the firm. The purpose of this study is to analyse the newlineimpact of two major leadership styles, transformational and transactional leadership, on the newlinefinancial performance directly and through creativity, innovativeness and entrepreneurial newlineorientation indirectly. The integrated model developed in this study serves to provide a useful newlineframework for the SMEs to decide which style of leadership to be followed. The role of newlineleadership style in interpreting business s financial performance will complement the newlineleadership literature. newlineDrawing on a sample of 357 key informants of SMEs from India, analysing was done with PLSSEM newlineand with the aid of WarpPLS 5.0 software, in which these constructs are linked. The newlineexhaustive measurement scale operationalised by this study, can be applied to any industry newlinesector to find how these two leadership styles impact the growth, profitability and hence the newlineoverall financial performance of an organisation. newlineThe results indicate that transformational leadership style has a positive direct impact on newlinecreativity, innovativeness, entrepreneurial orientation and financial performance of SMEs while newlinetransactional leadership style negatively impacts the financial performance. In addition to that, newlineinnovativeness and entrepreneurial orientation have a positive impact on financial performance. newlineOur results indicate that transformational leadership might be an appropriate approach for the newlinemanagement for maximising the financial performance in SMEs. newlineThis research and findings will add to the existing body of knowledge with several theoretical newlinecontributions that serve to confirm, clarify and extend previous knowledge in the areas of newlineleadership styles and performance of SME literature. newlineDiscussion of the results along with the limitations, future research, and implications are also newlinepresented