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

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

Authors: Niluh Putu Dian Rosalina Handayani Narsa¹ and Supriyadi²

Affiliations: 1. Faculty of Economics & Business, Airlangga University, Surabaya, Indonesia; 2. Faculty of Economics & Business, Gadjah Mada University, Jogjakarta, Indonesia

Publisher: ASIA-PACIFIC JOURNAL OF ACCOUNTING & ECONOMICS

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 (selfcertification 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

Sources: https://www.tandfonline.com/doi/abs/10.1080/16081625.2019.1546563?journalCode=raae20