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

The Accounting Review, Forthcoming

2 Pages Posted: 31 Aug 2010 Last revised: 4 Mar 2016

See all articles by Bruce I. Davidson

Bruce I. Davidson

University of West Florida

Douglas E. Stevens

Georgia State University - Robinson College of Business

Date Written: May 30, 2012

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.

Keywords: code of ethics, certification, social norm activation, corporate governance

JEL Classification: C71, G30, M41

Suggested Citation

Davidson, Bruce I. and Stevens, Douglas E., Can a Code of Ethics Improve Manager Behavior and Investor Confidence? An Experimental Study (May 30, 2012). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1668745 or http://dx.doi.org/10.2139/ssrn.1668745

Bruce I. Davidson

University of West Florida ( email )

11000 University Parkway
Pensacola, FL 32514-5750
United States

Douglas E. Stevens (Contact Author)

Georgia State University - Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
404-413-7212 (Phone)
404-413-7203 (Fax)

HOME PAGE: http://robinson.gsu.edu/profile/douglas-e-stevens/

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