Electronic copy available at: http://ssrn.

com/abstract=1668745

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




Bruce I. Davidson
Old Dominion University

and

Douglas E. Stevens
Florida State University and
The Adam Smith Research Foundation, University of Glasgow





May 30, 2012





Forthcoming The Accounting Review
Electronic copy available at: http://ssrn.com/abstract=1668745


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


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 Bicchieris (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

Data Availability: Experimental data are available from the authors upon request.