Agency Costs of Moral Accounting in Hierarchical Relationships

Abstract

Agents may spend firm resources on activities that have moral connotations (e.g., ESG or charitable donations) not because they expect financial benefits but to compensate for prior immoral actions-even those they did not instigate. In an incentivized experiment, I provide evidence of this so-called moral cleansing when principals instigated an immoral action. In contrast, I find no evidence of moral cleansing when agents instigated an immoral action. Instead, agents seem to cope by morally disengaging from their actions "on the job." Firms can learn from this finding that financial benefits stemming from an immoral action may be reduced by agents' compensatory actions. Firms can also try to prevent agents from spending firm resources on moral activities that lack financial benefits by adjusting their control systems. Extending current discussions about firm spending that has moral connotations, I demonstrate in a second incentivized experiment that firms can manage agents' decentralized moral spending decisions by themselves centrally funding moral activities.

Keywords: Agency Costs, Moral Cleansing, Moral Disengagement, Corporate Giving, ESG/Sustainability/CSR G30

JEL Classification: G30; M12; M14; M41; M48