Can a Code of Ethics Improve Manager Behavior and Investor Confidence? An Experimental Study

Abstract

Policy makers and corporations have recently emphasized a code of ethics as an effective aspect of corporate governance. The corporate governance literature in accounting, however, provides little empirical or theoretical support for this emphasis. We address this gap between public policy and the literature by studying the effectiveness of a code of ethics in an experimental setting. Using Bicchieri's (2006) model of social norm activation, we predict that a code of ethics will improve manager return behavior and investor confidence to the extent that it activates social norms that control opportunistic behavior. Further, we predict that adding a certification choice whereby the manager can publicly certify that he will adhere to the code will enhance the potential for the code of ethics to activate such norms. We find that a code of ethics only improves manager return behavior and investor confidence when the code incorporates a public certification choice by the manager. When the code is present but there is no certification choice, manager return behavior does not improve and investor confidence erodes over time because of increased expectations that are not met by managers. An analysis of individual return decisions and exit questionnaire responses supports the activation of social norms as the underlying mechanism behind our results.

The Robustness of Honesty Effects on Budget Proposals when the Superior has Rejection Authority

“…For example, Tayler and Bloomfield (2011) show that social norms can control opportunism in the presence of formal controls, while Davidson and Stevens (2013) show that social norms can control opportunism through a manager's certification of a code of ethics. Our results also support the effort by some theorists to incorporate social norms into traditional agency theory.…”

“…In contrast to the traditional game theory prediction that the proposer will offer the minimal share of the surplus and it will be accepted by the responder, proposers commonly offer 30-50 percent of the surplus and responders commonly reject offers below 20 percent (Croson 1996;Hoffman, McCabe, and Smith 2000;Guth et al 2001;Charness and Gneezy 2008;Stanca 2010). Bicchieri's (2006) model and a detailed discussion of its usefulness to experimental research in accounting, see Davidson and Stevens (2013). 7 While empirical expectations aid in social norm activation, it is possible for normative expectations alone to activate a social norm, provided an individual recognizes this expectation as legitimate in and of itself (Bicchieri 2008).…”

“…Researchers in accounting have begun to reference Bicchieri's (2006) model to predict how and when environmental cues activate social norms that affect the behavior of the principal and the agent (Douthit, Kearney, and Stevens 2012;Davidson and Stevens 2013). 6 A social norm is a behavioral rule that may become salient and affect behavior in a given social setting.…”

“…Thus, distributional fairness is unlikely to be as salient in budgeting settings in practice as in experimental budgeting settings where relative pay is transparent. Experimental studies in economics (Carpenter 2002;Dana et al 2007) and accounting (Kachelmeier and Towry 2002;Davidson and Stevens 2013) reduce the salience of distributional fairness by keeping relative pay information hidden from participants. Therefore, we manipulate the salience of distributional fairness by disclosing or withholding information about the relative pay of the superior.…”

Culture follows design: Code design as an antecedent of the ethical culture

“…The tone is considered important in conveying the message that the code's aim is either to provide guidance for employees with a positive, benevolent tone or to engage in command and control with a negative, authoritarian tone (Gaumnitz & Lere, 2004). Top management's signatures are assumed to function as a signal demonstrating their commitment to ethical and compliance issues (e.g., Davidson & Stevens, 2013). As both design elements differ in codes of ethics from company to company, the question arises as to whether these design features make a difference.…”