The role of companies’ codes of ethics in mitigating managers’ escalation behavior in the frame of agency theory

ABSTRACT

This study examines the role of codes of ethics used to reduce the tendency for managers to irrationally escalate their investment decision commitments, and compares the effectiveness of such codes of ethics in mitigating the escalation of these commitments. Based on 2 (adverse selection and no adverse selection) x 3 (self-certification of code of ethics with signatures, code reading, and no code of ethics) factorial experimental data, the participants in the adverse selection condition tend to escalate more than those who do not. The code of ethics (self-certification of code of ethics with signatures and code reading) is significantly able to mitigate the manager’s escalation behavior. Furthermore, the code certification with signatures is the most effective method to mitigate the escalation of commitment. This study contributes to the literature on the escalation of commitment by providing empirical evidence of effective de-escalation strategies through the organizational ethics aspect.

KEYWORDS:

• Agency theory
• code of ethics
• de-escalation
• escalation of commitment

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. An additional test was conducted by performing an ANOVA two-way 2 × 2 test. The details of the tests done by comparing groups 2 + 5 with groups 3 + 6, then groups 1 + 4 with groups 3 + 6. Table 8 presents the ANOVA test 2 × 2 groups 2 + 5 with groups 3 + 6 indicating that a marginal significant main effect was found for the adverse selection (F = 3.119; p < 0.09). Furthermore, the ANOVA 2 × 2 of groups 1 + 4 with groups 3 + 6 in Table 9 shows a significant main effect for the adverse selection (F = 5.802; p < 0.02).

2. These results are also supported by additional analysis using ANOVA 2 × 2 as described in footnote number two.