Agency Costs of Moral Accounting in Hierarchical Relationships

41 Pages Posted: 9 Aug 2018 Last revised: 14 Feb 2019

Date Written: February 10, 2019

Abstract

Agents can face financially profitable, but immoral decisions as part of their job to increase their principals’ profits. According to prior research, these decisions might urge agents to compensate for them and to balance moral accounts as it has been shown that individuals tend to increase spending on a moral cause after immoral decisions. This so-called “moral cleansing” would lead to agency costs if agents used their principals’ resources to pay for the moral activities. To examine whether a financially profitable, but immoral decision results in agency costs and whether this is affected by the person responsible for the immoral decision I conduct a 2 (Morality: morally neutral vs. immoral decision) x 2 (Source of Responsibility: principal vs. agent) between-subjects experiment. I predict that agents increase their use of firm resources to pay for moral cleansing activities when principals are responsible for the immoral decision and that this moral cleansing is weaker when agents are responsible. The underlying intuition is that agents in the former case have good reasons and few concerns to use firm resources, but find it harder to justify the use of firm resources in the latter case: further, agents’ moral identities may be less compromised when they can justify their behavior as just “doing their job”. Results support my predictions. While spending of firm resources on a moral cause is higher when principals are responsible for an immoral decision compared to a morally neutral decision, moral spending is not higher when agents are responsible. This study identifies potential agency problems due to moral cleansing and discusses further implications.

Keywords: Agency Costs, Corporate Giving, Corporate Social Responsibility (CSR), Sustainability, Moral Reasoning, Moral Cleansing, Source of Responsibility, Moral Disengagement

Suggested Citation

Hörner, Christoph, Agency Costs of Moral Accounting in Hierarchical Relationships (February 10, 2019). Available at SSRN: https://ssrn.com/abstract=3228425 or http://dx.doi.org/10.2139/ssrn.3228425

Christoph Hörner (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

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