Accounting, Organizations and Society xxx (xxxx) xxx

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Accounting, Organizations and Society

journal homepage: www.elsevier.com/locate/aos

Corporate social responsibility and capital budgeting

Patrick R. Martin
University of Pittsburgh, USA

a r t i c l e i n f o a b s t r a c t

Article history: Using an experiment, I examine whether managers have preferences for corporate social responsibility
Received 31 August 2017 (CSR) in a capital budgeting setting and the factors that influence the extent to which they act on these
Received in revised form preferences. I find that managers have and act on preferences for CSR by reporting to implement higher
20 December 2020
cost CSR investments that reduce firm profit even when they have financial incentives not to do so. I also
Available online xxx
find that when managers need to misreport to act on their preferences for CSR, their willingness to act on
such preferences is decreased due to a desire to be honest. Conversely, an opportunity to create slack for
Keywords:
personal benefit increases managers’ willingness to act on their CSR preferences, offsetting the decrease
Corporate social responsibility
CSR
resulting from honesty concerns. Together these findings demonstrate that managers’ preferences for
Capital budgeting CSR investments can influence behavior even in the presence of competing economic incentives and
Managerial accounting social norms. Finally, an analysis of firm profit shows that firms may be better off financially with
Honesty managers who act on preferences for CSR investments rather than managers who have strong prefer-
Reporting ences for wealth. This result obtains because managers with strong CSR preferences do not create slack to
the same extent as managers with strong preferences for wealth. These results have implications for both
theory and practice because they show that managers’ reports used to make investment decisions are
influenced by their personal CSR preferences.
© 2021 Elsevier Ltd. All rights reserved.

1. Introduction tradeoffs between maximizing shareholder value versus engaging

The traditional economic view of corporations is that managers
have a singular responsibility to maximize shareholder value,
subject to the constraint of governmental laws and regulations
(Be
nabou & Tirole, 2010; Friedman, 1970). However, the view that
corporations have responsibilities to a wider range of stakeholders
than just shareholders has recently become more prominent
(Business Roundtable, 2019). Managers who adopt this view may
engage in corporate social responsibility (hereafter CSR) to reduce
the negative externalities of corporations on society (Be
nabou &
Tirole, 2010; Elhauge, 2005; Moser & Martin, 2012; Reinhardt
et al., 2008). The potential tension between these viewpoints is
illustrated in the widely used definition of CSR as “sacrificing profits
in the social interest” (Elhauge, 2005; McWilliams et al., 2006;
Reinhardt et al., 2008; Reinhardt and Stavins, 2010; Be
nabou &
Tirole, 2010). This definition of CSR explicitly recognizes that
managers may often need to make tradeoffs between maximizing
shareholder value and engaging in CSR.
The extent to which corporate managers are willing to make
E-mail address: prm75@pitt.edu.
in CSR likely depends on the incentives they face, the degree to
which their actions are observable by shareholders, and their per-
sonal preferences. For example, upper-level managers likely face
significant incentives tied to firm profit and have a strong sense of
fiduciary responsibility to produce profits for shareholders. In
comparison, lower-level managers who do not face the same de-
gree of incentives may feel they can more easily act on their per-
sonal preferences. This potential difference is especially important
in capital budgeting settings where information asymmetry be-
tween upper-level and lower-level managers is quite common,
allowing lower-level managers’ preferences for CSR to influence
capital investment decisions even when upper-level managers
prefer to maximize firm profits. Consequently, I examine whether
lower-level managers have preferences for CSR activities that affect
their decisions in a capital budgeting setting, factors that affect the
extent to which these managers act on such preferences, and the
implications for firm profit.
A fundamental characteristic of most capital budgeting settings
is that lower-level reporting managers (hereafter referred to as
“managers”) often have better information than their upper-level
manager superiors (hereafter referred to as “superiors”) about the
actual cost and profitability of possible investment projects. This

https://doi.org/10.1016/j.aos.2021.101236
0361-3682/© 2021 Elsevier Ltd. All rights reserved.

Please cite this article as: P.R. Martin, Corporate social responsibility and capital budgeting, Accounting, Organizations and Society, https://
doi.org/10.1016/j.aos.2021.101236
P.R. Martin
information asymmetry results in the need for managers to report
their private information to their superiors. If managers have
preferences for CSR activities, their reports may reflect a preference
for CSR investments over non-CSR investments. Consistent with the
widely used definition of CSR as “sacrificing profits in the social
interest” (Elhauge, 2005; Reinhardt et al., 2008; Be
nabou & Tirole,
2010), I define managers as demonstrating a preference for CSR
whenever they cause a CSR investment to be implemented rather
than a more profitable non-CSR investment. Defining CSR prefer-
ences in this manner is important to rule out the alternative
explanation that managers make decisions in favor of CSR in-
vestments simply because they expect such investments to result in
higher firm profit.
This study builds on prior capital budgeting research by exam-
ining how CSR preferences affect managers’ reporting behavior in
capital budgeting settings. Such research has focused on two other
preferences that are likely to influence managers’ reporting
behavior in capital budgeting settings: preferences for honesty and
preferences for the wealth managers can obtain by building slack
into their reports (Brown et al., 2014; Douthit & Stevens, 2015;
Evans, Hannan, Krishnan, and Moser 2001; Rankin et al., 2008).
Consistent with Douthit and Stevens (2015), I assume that man-
agers’ honesty preferences reflect a social norm to be honest. In a
similar manner I also expect that managers’ preferences for CSR
reflect a norm to be socially responsible. Thus, I draw on insights
from social norm theory to develop my predictions regarding how
managers’ CSR preferences in capital budgeting settings are
affected by a competing social norm to be honest.
Because information asymmetry results in the need for man-
agers to make reports to their superiors, managers can overstate
the cost of an investment they report to their superiors to create
“slack” for their personal financial benefit. Although prior research
shows that many managers create significantly less slack than the
maximum amount available (Brown et al., 2014; Douthit & Stevens,
2015; Evans et al., 2001; Rankin et al., 2008), these studies also
show that many managers do build some amount of slack into their
reports. In addition to honesty preferences, the ability to create
slack is another factor that is likely to influence the extent to which
managers act on their preferences for CSR investments in capital
budgeting settings. That is, when acting on preferences for CSR
investments is personally costly to the manager, the ability to create
slack provides managers with a way to offset some or all of that
personal cost. If managers view the opportunity to create slack this
way, they will be more likely to act on their preferences for CSR
investments when they have the ability to create slack.
I address the issues outlined above with an experiment that
examines the following research questions: First, do managers have
preferences for CSR investments that affect their decisions in a
capital budgeting setting? Second, does the presence of a
competing social norm of honesty reduce managers’ tendency to
act on their preferences for CSR investments when managers must
misreport to act on those preferences? Third, does the ability to
create slack that is present in most capital budgeting settings make
managers more willing to act on their CSR preferences, potentially
offsetting the effect of honesty preferences? Finally, I examine how
firm profit is affected by the combination of preferences for CSR,
preferences for honesty, and preferences for wealth in a capital
budgeting setting in which a CSR investment is being considered.
The results of my experiment show that managers in a capital
budgeting setting have preferences for CSR investments and act on
such preferences even when they face financial incentives that
make doing so personally financially costly. However, I also find
that when managers need to misreport to act on their CSR prefer-
ences, the presence of a competing social norm for honesty
significantly reduces the extent to which managers act on their
2
Accounting, Organizations and Society xxx (xxxx) xxx
preferences for CSR investments. Finally, I find that the ability to
create slack increases managers’ tendency to act on their prefer-
ences for CSR investments, offsetting the impact of honesty pref-
erences. In addition to documenting these effects on managers’
reporting behavior, my results show that, although firm profit is
reduced when managers have preferences for CSR investments,
firm profit is actually higher when managers have strong prefer-
ences for CSR than when managers have strong preferences for
wealth.1
This study contributes to two important literatures in account-
ing. First, I contribute to the CSR literature by showing that man-
agers’ preferences for CSR can influence their decision making in a
capital budget setting. Specifically, I provide evidence that man-
agers act on their preferences for CSR even when doing so is
personally financially costly and reduces firm profit. Further, I show
that this willingness to act on their preferences for CSR is reduced
when the social norm of honesty becomes salient to managers
when they need to misreport to act on their preference for CSR.
Second, this study contributes to the capital budgeting literature by
incorporating the potential for CSR investments to activate social
norms that can influence such investment decisions. Previous
research has examined various factors that can influence managers’
reports in capital budgeting settings, including preferences for
wealth, honesty, fairness, and reciprocity (Brown, Evans and Moser
2009; Douthit & Stevens, 2015). This study adds to this literature by
providing evidence that preferences for CSR can also play a role in
managers’ reporting behavior in capital budgeting settings.
Although in my setting the superior explicitly prefers to maxi-
mize firm profits, my finding that managers incorporate their
personal CSR preferences into their reports likely applies to any
capital budgeting setting with information asymmetry between
managers and their superiors.2 This is the case because, irrespective
of the superior’s preference for profit maximization versus CSR,
information asymmetry prevents the superior from knowing
whether, or to what extent, their managers’ reports reflect the
managers’ personal preferences for CSR. Therefore, whether the
superior’s preferences for profit maximization versus CSR are
stronger or weaker than those of their manager, my results provide
evidence that the managers’ personal CSR preferences can influ-
ence the reports used by the superior to make capital budgeting
decisions. To the extent that some superiors have strong prefer-
ences for CSR and therefore would like to encourage investment in
CSR projects, my finding that their managers may share such
preferences is likely to be viewed as good news. Even if superiors do
not have preferences for CSR and would prefer to maximize firm
profit they may desire subordinate managers who have preferences
for CSR rather than strong preferences for wealth because my re-
sults also show that firm profit can actually be higher in this case.
1
Because both of these firm profit effects rely on information asymmetry, this
result is possible in any setting in which lower-level reporting managers have an
information advantage in a capital budgeting setting - a common assumption in the
capital budgeting literature.
2
When managers and their superiors can both have preferences for wealth and
for CSR, there are three distinct possibilities: 1) managers could have weaker
(stronger) preferences for wealth (CSR) than their superiors, 2) managers could
have stronger (weaker) preferences for wealth (CSR) than their superiors, and 3)
managers and their superiors could have precisely the same strength of preferences
for wealth and CSR. My setting incorporates the preferences in setting 1 because
this setting captures the real-world expectation that upper-level managers (the
superiors in my setting) likely face stronger incentives tied to firm profit and a
greater sense of fiduciary responsibility to shareholders compared to lower-level
managers (the subordinate managers in my setting) and because this setting al-
lows me to rule out alternative explanations for subordinate managers’ behavior.
However, there is no reason to expect that such preferences would be diminished if
managers had knowledge that their superior also had preferences for CSR projects
as in settings 2 and 3 described above.
P.R. Martin
This seemingly surprising result arises because managers with
strong wealth preferences use the presence of information asym-
metry to create slack for personal financial gain to a greater extent
than managers who have strong preferences for CSR.
Finally, given that CSR is an area of increasing focus for many
firms, i.e., 75% of the 4,900 global companies surveyed and 93% of
the 250 largest global corporations now engage in external
reporting of their CSR activities (KPMG 2017), the issues examined
in my study are taking on increasing importance. That is, the
increasing focus on CSR makes it more likely that investment op-
tions under consideration will include possible CSR alternatives. For
example, businesses could consider the societal impact of their
energy usage by evaluating projects that reduce energy consump-
tion or use renewable energy to reduce carbon emissions instead of
more traditional energy sources (Porter & Kramer, 2006).3 Because
of the potential for many business decisions to give rise to the
evaluation of possible CSR investments, my findings likely apply to
many important real-world business settings.
2. Background and hypothesis development
2.1. Background
Like many of the prior experimental capital budgeting studies,
(Brown et al., 2014; Douthit & Stevens, 2015; Evans et al., 2001;
Rankin et al., 2008), my setting captures the key features of Antle
and Eppen’s (1985) theoretical capital budgeting model. In their
model the principal (the upper-level superior in my setting) and the
agent (the lower-level manager in my setting) are considering a
possible investment project. The associated revenue and the range
of possible costs of the investment project are known to both the
superior and the manager, but only the manager knows the true
cost of the project. The manager’s information advantage regarding
the true cost of the project creates a need for the manager to make a
report of the project’s cost to the superior. If the superior decides to
make the investment, s/he transfers the reported cost of the project
to the manager to implement the project. The traditional agency
prediction for this setting is that the manager will submit the
highest allowable cost report in order to capture the greatest
amount of slack for their personal benefit (slack is defined as the
difference between the reported cost and the actual cost to
implement the project).
To examine the possible effects of managerial preferences for
CSR investments my study adds two key features to the basic
setting described above. First, rather than a single investment
project being considered, my setting includes two different types of
projects: a CSR investment project and a non-CSR investment
project. This allows managers to use their information advantage to
create slack for their personal financial benefit as in the prior
studies but also to affect whether the CSR or non-CSR project is
implemented. Second, for every CSR project that is implemented in
my study, an actual cash donation is made to a real “green” fund
(Carbonfund.org) that works to reduce carbon emissions. Thus,
managers’ reporting decisions in my study not only affect their
personal financial wealth and the firm’s profit as in prior studies,
but also have a real impact on society.
3
O’Dwyer and Unerman (2016) provide the following list of areas where firms
are likely to consider sustainability issues: “employment terms and conditions, union
recognition and interactions, supply chain impacts such as human rights abuses in
supply chains, impacts on communities comprising health impacts, displacement of
communities, socioeconomic impacts when organizations leave communities, and
consumer impacts such as product safety and responsible advertising.” This list ap-
pears to encompass many situations that could be a part of the capital budgeting
process.
3
Accounting, Organizations and Society xxx (xxxx) xxx
Although the effect of a norm to be socially responsible
(resulting in preferences for CSR activities) has not been examined
in prior capital budgeting research, other behavioral norms such as
honesty have been extensively examined. I follow the approach
used in such prior capital budgeting studies to rule out financial
self-interest as an alternative explanation for managerial decisions
by making adhering to the norm to be socially responsible costly to
the manager. That is, as in the prior studies that made it costly to
the manager to report honestly, I use a setting in which there is a
financial disincentive for managers to act on preferences for CSR
activities. In addition, I follow the approach used by Douthit and
Stevens (2015) by using social norm theory to guide my pre-
dictions for how managers’ behavior is affected by competing social
norms.
Following the basic structure and procedures used in many prior
capital budgeting studies allows me to leverage the findings from
these prior studies when testing for the effects of CSR preferences.
That is, we know from prior capital budgeting studies that man-
agers typically need to make tradeoffs between personal wealth,
preferences for honesty, and concern for firm profit. In my setting,
managers must make tradeoffs between these same three prefer-
ences, but also a new preference, i.e., a preference to be socially
responsible. My experiment is designed to examine how managers
make tradeoffs among these important preferences when making
reporting decisions.
2.2. Hypothesis development
Prior research has noted that because CSR activities are likely
motivated by a concern about corporations’ negative externalities,
social norms are expected to play a role in guiding managers’
behavior related to such activities (Be
nabou & Tirole, 2010;
Elhauge, 2005). Specifically, Be
nabou and Tirole (2010, p. 2) argue
that appropriate behavior related to CSR within firms is influenced
by “the pressure of social norms and popular demands that firms be
socially responsible” and Elhauge (2005, p. 15) explains that man-
agers temper their obligation to maximize firm profits “in order to
comply with social and moral norms.” In line with these expecta-
tions, Bicchieri (2006, p. 19) notes that social norms are needed to
“internalize externalities created by behavior that imposes cost on
other people”.
These expectations and descriptions of social norms are relevant
to my setting in which managers may be influenced by information
about the nature of possible investments. Specifically, managers in
my setting evaluate two investment projects, a CSR investment that
results in the reduction of the negative externality of carbon
emissions and a non-CSR investment that is not associated with any
positive or negative societal impact. If managers’ choices reflect a
preference for the CSR investment over the non-CSR investment,
this would provide evidence that they are influenced by a norm to
be socially responsible. In contrast, if managers are only influenced
by the effect of the project on firm profit and not by the nature of
the project (CSR versus Non-CSR), this would suggest that man-
agers’ choices are not influenced by a norm to be socially respon-
sible. I also provide managers in my experiment with a personal
financial incentive not to sacrifice firm profits to benefit society.
This design feature reflects the fact that managers often have
financial incentives tied to firm profit and allows for a clean
interpretation of managers’ behavior in my study because any
managers in my study who act to get a higher cost CSR project
implemented must have a preference for CSR that is strong enough
to overcome any preferences for their own financial gain as well as
any concerns about firm profit. This design feature is also consistent
with the expectation from social norm theory that social norms are
especially applicable to situations in which the desire to be pro-
P.R. Martin
social conflicts with self-interested incentives (Bicchieri, 2006; Blay
et al., 2018).
Because both a norm to be socially responsible and financial
incentives to ignore the social aspect of possible investments are
both present in my setting, both are likely to influence behavior. It is
important to note that social norm theory allows for a mix of
situational cues in a given setting and does not predict uniformity
in behavior. Instead, social norm theory predicts a heightened or
lessened adherence to a specific social norm depending on the mix
and strength of situational cues in the setting (Bicchieri, 2006). This
prediction is particularly important when the social norm conflicts
with self-interest as in my setting. As Bicchieri (2006, p. 12) notes:
“social norms need not be universally conditionally preferred or even
conditionally known about in order to exist. A certain amount of
opportunistic transgression is to be expected whenever a norm con-
flicts with individuals’ self-interest.”
There are several reasons to expect that a significant number of
managers in my setting will view implementing an investment that
benefits society as a social norm. First, there has been explosive
growth in recent years in investment funds that explicitly consider
environmental, social and corporate governance (ESG) criteria
when selecting investments. Such funds are referred to as SRI
(sustainable, responsible, and impact) funds and as of year-end
2017 they accounted for nearly 25% of dollars under professional
investment management and have been growing at more than 13%
per year (US SIF Foundation, 2018). This suggests that there are
many individuals who care about, and want to encourage, corpo-
rate actions that benefit society. Second, a recent experimental
study (Martin & Moser, 2016) finds that a significant portion of
manager-participants chose to invest in profit-reducing CSR activ-
ities and report these investments to investors. Finally, the exis-
tence of CSR reports that include considerable information about a
company’s societal impact suggests that a significant number of
stakeholders care about the societal impact of the company’s in-
vestments. Therefore, I expect that a significant portion of man-
agers in my setting will view being socially responsible as a social
norm and thus will act to implement the CSR investment even
when doing so reduces their personal wealth and firm profit. This
expectation is formally stated in my first hypothesis:
H1. Managers in a capital budgeting setting will favor CSR in-
vestments over non-CSR investments even when doing so reduces
their personal wealth and firm profit.
Social norm theory assumes that individuals differ in their
willingness to adhere to social norms (Bicchieri, 2006). As
explained earlier, upper-level managers (the superiors in my
setting) are likely to face significant incentives tied to firm profit
and feel a strong sense of fiduciary responsibility to shareholders,
which may make them less willing to trade off firm profit for CSR
than their lower-level manager. In this case, the manager may need
to misreport costs in order to act on their personal preferences for
CSR, which introduces a competing social norm that could influ-
ence managerial behavior, i.e., honesty preferences.4
Prior research demonstrates that preferences for honesty deter
some individuals from misreporting for personal financial benefit
in capital budgeting settings (Douthit & Stevens, 2015; Evans et al.,
2001; Rankin et al., 2008). Consistent with these prior studies, I
manipulate whether managers’ honesty preferences could affect
4
Although this specific scenario of the upper-level manager having stronger
preferences for firm profit is the one used in my study, the expectation that lower-
level managers would need to misreport to act on their personal preferences for
CSR holds for any setting in which the lower-level manager knows or perceives that
their superior’s CSR preferences are not as strong as their own.
4
Accounting, Organizations and Society xxx (xxxx) xxx
their decision by manipulating the presence versus absence of a
requirement to make a factual assertion of the project cost (Douthit
& Stevens, 2015; Rankin et al., 2008). Managers’ honesty prefer-
ences are only relevant when a factual assertion of project costs is
required because it is only in this case that the manager can
respond in a way that is objectively untrue.
Although I manipulate the relevance of managers’ honesty
preferences in the same way as in prior capital budgeting studies,
there are two key differences between my setting and the settings
in the prior studies. First, I examine the ability of honesty prefer-
ence to reduce a different kind of misreporting than the mis-
reporting examined in the prior studies. The prior studies focused
on the effects of honesty preferences on misreporting for a direct
personal financial benefit (Brown et al., 2014; Douthit & Stevens,
2015; Evans et al., 2001; Fischbacher & Fo € llmi-Heusi, 2013). In
contrast, I examine the impact of honesty preferences on mis-
reporting in favor of CSR investments. This distinction is critical
because misreporting in favor of CSR investments in my setting is
personally financially costly, but beneficial for society. In addition,
other prior research shows that increasing individuals’ ability to
interpret their dishonesty as having no significant moral implica-
tions makes them more dishonest (Mazar et al., 2008). Thus,
honesty preferences may be less effective in reducing misreporting
in favor of CSR investments than in reducing misreporting for
personal financial gain because misreporting at a personal cost to
benefit society may be considered less immoral than misreporting
for personal financial benefit.
Second, when managers need to misreport to act on their
preferences for CSR, their preferences for CSR are in conflict with
their preferences for honesty. Because prior studies have not
examined a setting with these specific conflicting social prefer-
ences, it is an open question which of these two preferences is more
likely to guide managers’ behavior. In line with Douthit and Stevens
(2015), who also examine conflicting social norms in a capital
budgeting setting, I use Bicchieri’s (2006) model to predict that
when social norms are in conflict, behavior will be guided by the
salience of the respective social norms. Specifically, I predict that
requiring managers to make a report of project costs will reduce
their willingness to act on their CSR preferences because the
reporting requirement makes salient the need to violate the con-
flicting honesty norm to do so. This leads to my second hypothesis:
H2. When acting on CSR preferences requires misreporting,
managers’ preferences for honesty will reduce the frequency with
which managers act on their preferences for CSR activities.
As noted earlier, information asymmetry typically allows man-
agers to build slack into their reports for their personal financial
benefit and this could affect the extent to which managers act on
their preferences for CSR investments. It is important to note that
when managers have the opportunity to create slack there are two
separate and distinct types of misreporting possible; misreporting
to create slack and misreporting to get the CSR project imple-
mented. These two types of misreporting have opposing effects on
the manager’s payoff. Misreporting to create slack increases the
payoff to the manager while misreporting to implement the CSR
projects decreases the payoff to the manager while benefiting
society.
Social norm theory provides two reasons to expect the oppor-
tunity to create slack to decrease adherence to an honesty norm
and thus increase managers’ misreporting in favor of CSR projects.
First, situational cues can strengthen or weaken adherence to a
social norm (Bicchieri, 2006; Douthit & Stevens, 2015). The
expectation that situational factors can affect managers’ adherence
to the honesty norm is in line with recent capital budgeting studies
(Abdel-Rahim & Stevens, 2018; Stevens, 2019). In addition, prior
P.R. Martin
capital budgeting studies show that managers will often misreport
to create slack, suggesting that financial incentives to create slack
are a situational cue that weakens the honesty norm. Specifically,
Evans et al. (2001) report average slack between 51.3% and 57.1%,
Rankin et al. (2008) report between 51.6% and 64.3%, and Douthit
and Stevens (2015) report between 41.1% and 51.3%. Based on
such evidence, it is reasonable to expect managers in my study to
also misreport to create slack, thus weakening adherence to the
honesty norm and leading to an overall increase in misreporting in
favor of CSR projects.
Second, according to social norm theory, adherence to a social
norm depends on expectations of others’ behavior. Specifically,
adherence to a social norm increases with expectations that others
will adhere to the norm and decreases with expectations that
others will not adhere to the norm (Bicchieri, 2006). If, as noted
above, managers misreport to create slack when given the oppor-
tunity to do so, they likely expect others to do the same. This, in
turn, is likely to decrease adherence to the honesty norm. Prior
accounting research supports this prediction that misreporting is
affected by others’ behavior. For example, Cardinaels and Yin (2015)
and Cardinaels and Jia (2016) provide evidence that the extent to
which individuals’ misreport is affected by the misreporting
behavior of their peers. This reasoning further supports the pre-
diction that the opportunity to create slack will weaken adherence
to the honesty norm and result in an overall increase in mis-
reporting in favor of CSR projects.
In addition to reducing adherence to the honesty norm as dis-
cussed above, the opportunity to create slack could increase
reporting in favor of a higher cost CSR investment because creating
slack allows managers to offset their personal financial cost of
acting on their preferences for CSR. For example, for every $1 a
manager’s payoff is reduced by misreporting in favor of a higher
cost CSR project, the manager could build $1 of slack in their report
to offset this personal financial cost of misreporting in favor of the
CSR project. Managers who view the opportunity to create slack
this way would be more likely to act on their preferences for CSR
when they have the opportunity to create slack than when they do
not.
The reasoning outlined above suggests that the opportunity to
create slack will not only result in misreporting to create slack, it is
likely to also increase misreporting in favor of CSR projects. This
leads to my third hypothesis:
H3. The opportunity to create slack increases managers’ willing-
ness to act on their preferences for CSR by misreporting to get the
CSR project implemented.
As noted above, capital budgeting settings with information
asymmetry and CSR investment options allow two distinct kinds of
misreporting: misreporting to cause a higher cost CSR investment
to be implemented and misreporting to create slack. While these
two kinds of misreporting have differing effects on managers’
payoffs, both kinds of misreporting reduce firm profit. Therefore,
firms are likely to be interested in how each of these kinds of
misreporting is influenced by manager “type”. That is, managers’
preferences for wealth, for honesty, and for CSR could each influ-
ence the extent to which they engage in either of these kinds of
misreporting. Thus, separating managers into “types” based on the
strength of each of these preferences could lead to important in-
sights regarding the effects on firm profit.
Managers in my setting can be separated into three possible
manager types: wealth types, honest types, and CSR types. Man-
agers whose actions are dominated by wealth (hereafter, “wealth
types”) would not misreport to implement a higher cost CSR in-
vestment, but would misreport to create a large amount of slack for
their own personal financial benefit. Managers whose actions are
5
Accounting, Organizations and Society xxx (xxxx) xxx
dominated by a preference for honesty (hereafter, “honest types”)
would also not misreport to implement a higher cost CSR invest-
ment but, unlike the wealth types, would also not misreport to
create slack. Managers whose actions are dominated by a prefer-
ence for CSR (hereafter, “CSR types”) would misreport to imple-
ment a higher cost CSR project, but it is not clear how much they
would misreport to create slack. On one hand, CSR types could
misreport only to get a higher cost CSR investment implemented,
but not misreport to create slack. On the other hand, CSR types
could misreport to both get a higher cost CSR investment imple-
mented and to create slack. While the amount of misreporting to
create slack by CSR types has not been previously examined, it
seems reasonable to expect CSR types to misreport to create at least
some slack to offset the personal cost of reporting in favor of CSR
investments.
The expectations outlined above for the amount of the two
kinds of misreporting by manager type leads to predictions about
the likely overall impact on firm profit by manager type (wealth
types, honest types, or CSR types). First, firm profit should be
highest for honest types because such managers will not engage in
either kind of misreporting (both of which reduce firm profit) while
wealth and CSR types would both engage in misreporting that
lowers firm profit. Second, wealth types would not be predicted to
misreport to implement higher cost CSR investments but would be
predicted to misreport to create the maximum possible slack for
their own personal benefit. CSR types would be predicted to
misreport to implement higher cost CSR investments and misre-
port to create at least some slack, but the likely amount is uncertain.
As outlined above, both wealth and CSR types will generate less
firm profit than honest types by definition. However, it is not so
clear how firm profit will differ between wealth and CSR types. On
the one hand CSR types are expected to misreport to implement
higher cost CSR investments while wealth types are not. On the
other hand, because wealth types are motivated so strongly by
preferences for wealth they would be expected to misreport to
create as much slack as possible, leading to a substantial reduction
in firm profit. If wealth types create a large enough amount of slack,
it is likely that CSR types will still generate more firm profit than
wealth types even though CSR types reduce firm profit by mis-
reporting to implement higher cost CSR investments and wealth
types do not. This expectation is based on the fact that CSR types
show greater concern for others than wealth types and therefore
are less likely to reduce firm profit by the maximum amount
possible via slack. This leads to my fourth hypothesis:
H4. Managers whose reporting choices are dominated by a pref-
erence for CSR (CSR types) will generate higher firm profit than
managers whose reporting choices are dominated by a preference
for wealth (wealth types).
3. Method
3.1. Participants
Participants for my experiment were recruited from MBA and
upper-class undergraduate business classes at a large public U.S.
University. There were 108 participants in total, with 36 partici-
pants in each of three experimental conditions described below.
Several experimental sessions were conducted for each condition,
with each session consisting of 24 periods. At the conclusion of
each session, one of the 24 periods was selected at random to be the
payment period, and all participants were paid their participation
fee and the payoff that they earned for the randomly selected
payment period.
P.R. Martin
3.2. Design
I use three experimental conditions (NoReport, Report and
ReportSlack) to test my hypotheses described above. In all three
conditions participants assume the role of a manager who observes
the cost of two separate and competing investment projects, a CSR
investment project and a non-CSR investment project.5 The man-
ager then makes either a recommendation or a report concerning
the two investments to their superior.6 The manager’s recom-
mendation or report determines which of the investments is
implemented.7
As explained further later, managers in all three conditions were
provided with their payoff function which made clear that they had
a financial incentive to cause the investment project with the
lowest actual cost to be implemented. Providing participants with a
personal financial incentive to always prefer that the lower-cost
project is implemented in all conditions is an important design
feature because this works against finding support for my hy-
potheses which predict differences across conditions. Participants
in all three conditions were also provided with the payoff function
for the firm so that they were aware of how their recommendation
or reporting choice would affect firm profit. Examples were pro-
vided in each of the experimental conditions to ensure that par-
ticipants understood how their choices affected both the type of
investment project that would be implemented as well their pay-
offs and the payoff to the firm.8
The three experimental conditions (NoReport, Report and
ReportSlack) are used to examine the role of CSR preferences in
capital budgeting as follows. The NoReport condition serves as a
baseline condition that establishes the extent to which managers
have personal preferences for CSR investments. The Report condi-
tion is used to isolate the effect of honesty preferences on the
extent to which managers act on their preferences for CSR in-
vestments. Finally, the ReportSlack condition is used to isolate the
incremental effect of the ability to create slack on the extent to
which managers act on their preferences for CSR investments.
Detailed procedures for each condition are described below.
3.3. NoReport condition procedures
In the NoReport condition, the manager’s task was to recom-
mend one of two separate and competing investment projects to
their superior for implementation (only one of the projects could be
implemented). One project was a “CSR” investment project that
resulted in lower carbon emissions, while the second investment
project was a “non-CSR” project that did not result in lower carbon
emissions. Each investment project provided an additional $40 in
cash flows to the company. Each manager recommended either the
CSR or the non-CSR investment project for implementation. The
recommended investment project was then automatically imple-
mented. Prior to making their recommendation, the managers
learned the actual cost for the CSR project and for the non-CSR
5
Because my study is focused on the reports of lower-level managers I follow the
practice of prior studies that are similarly focused on reports of subordinate
managers (Evans et al., 2001; Stevens, 2002; Young, 1985) by having all of the
participants assume the role of a lower-level manager.
6
This manipulation of the form of the budget communication by the manager (a
recommendation or a report) follows the manipulation used in Rankin et al. (2008)
and Douthit and Stevens (2015) in which they vary whether the budget commu-
nication contains a factual assertion.
7
This follows the practice of Evans et al. (2001) and Brown et al. (2014) in having
the manager’s report automatically accepted.
8 10
The examples provided across conditions were identical except for differences
directly attributable to the experimental manipulations.
6
Accounting, Organizations and Society xxx (xxxx) xxx
project.
Managers knew that if their recommendation resulted in the
CSR project being implemented, this had a real societal benefit
because it resulted in an actual cash donation to Carbonfund.org.
Carbonfund.org is a real non-profit environmental organization
that uses contributions to invest in renewable energy and refor-
estation projects that reduce the amount of greenhouse gases in the
environment. The managers were aware that each time their
recommendation resulted in the CSR project being implemented,
50% of the actual cost of the CSR project was contributed to this real
“green” fund.9 At the conclusion of the experiment, I made a cash
donation to Carbonfund.org equal to 50% of the actual cost of all CSR
projects implemented in the randomly selected payment period.
The specific steps for each period of the NoReport condition are
shown in Panel A of Fig. 1. In Step 1, each manager learned the
actual cost of both the CSR project and the non-CSR project with
certainty. The managers were informed that only they knew the
actual costs and that their superior could never learn which project
had the lowest actual cost because the superior only knew that the
actual cost for each project could range from $10 to $20 in in-
crements of $1.10 In Step 2, the manager recommended one of the
projects for implementation. In step 3, the recommended project
was implemented. Finally, in Step 4, payoffs to the manager and the
firm were calculated using the actual cost of the implemented
project.
Eight different actual cost pairs were used in the experiment. As
shown in Table 1, the lower cost project in each cost pair always had
a cost of $10, while the higher cost project in each cost pair was one
of the following costs: $11, $13, $15 or $20. Each of the eight specific
cost pairs was provided three times (8 cost pairs x 3 ¼ 24 total
periods). The order in which the cost pairs were presented to the
participants was randomly determined prior to the experimental
sessions, with this randomly determined pattern used in all
experimental sessions in all conditions.
The actual cost pairs provided to the participants followed a
balanced design in which the CSR project had a lower cost in four of
the cost pairs, and the non-CSR project had a lower cost in the
remaining four cost pairs. This balanced design allows me to better
isolate managers’ CSR preferences by testing whether the fre-
quency of higher cost CSR project implementation is greater than
the frequency of higher cost non-CSR project implementation.
The managers’ payoff in the NoReport condition consisted of a
bonus equal to 45% of the firm’s pre-bonus profit from the project
as shown below:
Manager’s payoff ¼ 45% x ($40 project cash flows - the actual cost
amount of implemented project)
This payoff calculation makes clear to the manager that always
recommending the project with the lowest actual cost maximizes
his or her payoff (see Panel A of Table 2).
Firm profit in the NoReport condition was equal to the cash flows
from the implemented project less the actual cost of the imple-
mented project and less the cost of the bonus paid to the manager
as shown below:
The firm’s profit ¼ $40 project cash flows e the actual cost amount
of the implemented project e bonus paid to the manager
9
While any portion of the cost would technically make the societal benefit real, I
chose to donate 50% of the cost of any CSR project implemented in the payoff
period to ensure that participants viewed the societal impact as substantial.
This ensured that the managers were not concerned with the possibility that
any misreporting would be uncovered.
P.R. Martin Accounting, Organizations and Society xxx (xxxx) xxx

Fig. 1. Steps in each period of the experiment.

Table 1
Cost pairs (all conditions)a.

CSR Projectb e Higher Costc Non-CSR Projectb e Higher Costd

CSR Project Cost Non-CSR Project Cost CSR Project Cost Non-CSR Project Cost

$11 $10 $10 $11

$13 $10 $10 $13
$15 $10 $10 $15
$20 $10 $10 $20
a
A cost pair consists of a cost for the CSR project and a cost for the non-CSR project. Exactly one half of the time the CSR project had the higher cost and one half of the time
the non-CSR project had the higher cost. The lower cost project of each cost pair was always $10, while the higher cost project was $11, $13, $15 or $20.
b
CSR projects worked to lower carbon emissions via a real donation to Carbonfund.org. Non-CSR projects did not result in a donation to Carbonfund.org.
c
Each of the four rows in the table below represent one possible cost pair in which the CSR project has a higher actual cost than the non-CSR project.
d
Each of the four rows in the table below represent one possible cost pair in which the non-CSR project has a higher actual cost than the CSR project.

This firm profit calculation makes clear to the managers that
firm profit is highest when the manager recommends the project
with the lowest actual cost.
3.4. Report condition procedures
The specific steps for the Report condition are shown in Panel B
of Fig. 1. The Report condition setting is the same as the NoReport
condition, except for one important difference. In the Report con-
dition, managers do not recommend a project to be implemented,
but rather must report the cost of each of the projects (Step 2 in
Panel B of Fig. 1). The project with the lowest reported cost is then
implemented (Step 3 in Panel B of Fig. 1). In contrast, as shown in
Panel A of Fig. 1, in the NoReport condition managers recommend a

7
P.R. Martin Accounting, Organizations and Society xxx (xxxx) xxx

Table 2
Panel A: Manager’s possible payoffs e NoReport & Report conditions.

Actual Cost -Higher Cost Projecta Actual Cost-Lower Cost Project Project Implemented Based on Recommendation or Reportb Manager’s Payoffc

$11 $10 Lower Cost Project $13.50

$11 $10 Higher Cost Project $13.05
$13 $10 Lower Cost Project $13.50
$13 $10 Higher Cost Project $12.15
$15 $10 Lower Cost Project $13.50
$15 $10 Higher Cost Project $11.25

Panel B: Manager’s Possible Payoffs e ReportSlack Condition

Actual Cost -Higher Cost Projectd Actual Cost-Lower Cost Project Implemented Projecte Manager’s Payoff Rangef

$11 $10 Lower Cost Project $13.50 - $18.45

$11 $10 Higher Cost Project $13.05 - $17.45
$13 $10 Lower Cost Project $13.50 - $18.45
$13 $10 Higher Cost Project $12.15 - $15.45
$15 $10 Lower Cost Project $13.50 - $18.45
$15 $10 Higher Cost Project $11.25 - $13.45
a
One-half of the time the CSR project was the higher cost project and one-half of the time the non-CSR project was the higher cost project.
b
The manager could recommend or report to get either the higher cost project or the lower cost project to be implemented.
c
The manager’s payoff was calculated by the following formula: 45% * ($40 e actual cost of the recommended project).
d
One-half of the time the CSR project was the higher cost project and one-half of the time the non-CSR project was the higher cost project.
e
The implemented project was the project with the lowest reported cost.
f
The manager’s payoff range was calculated using the following formula: 45% * ($40 e reported cost of the implemented project) þ (reported cost e actual cost of the
implemented project) The reported cost of the implemented project could range from a low of the actual cost to a high of $19.

project to be implemented (Step 2 in Panel A of Fig. 1), with the
recommended project being implemented (Step 3 in Panel A of
Fig. 1). Except for this difference, all other procedures, parameters
and payoffs described earlier for the NoReport condition are the
same for the Report condition.
3.5. ReportSlack condition procedures
The specific steps for the ReportSlack condition are shown in
Panel C of Fig. 1. The ReportSlack condition setting is the same as the
Report condition, except for one important difference. The payoff to
the manager in the Report condition is based on the actual cost of
the implemented project (Step 4 in Panel B of Fig. 1). Therefore,
managers cannot create slack for their personal financial benefit in
the Report condition. In contrast, as shown in Step 4 in Panel C of
Fig. 1, in the ReportSlack condition the payoff to the manager is
based on the reported cost of the implemented project. This allows
managers to build slack into their report for their personal financial
benefit because the manager can report a cost that is higher than
the actual cost for the project that will be implemented.
Thus, as shown below, the managers’ payoff in the ReportSlack
condition includes two components 1) the bonus equal to 45% of
the firm’s pre-bonus profit from the project, and 2) the difference
between the reported and the actual cost of the project that is
implemented:
Manager’s payoff ¼ 45% x ($40 project cash flows - the reported
cost amount of implemented project) þ (Reported cost of the
implemented project e actual cost of the implemented project)
This payoff calculation makes clear to the managers that the
range of their personal payoffs is always higher when their report
causes the project with the lowest actual cost to be implemented
(see Panel B of Table 2).11
The firm’s profit from the implemented project is equal to the
cash flows from the project less the reported cost for the imple-
mented project and less the cost of the bonus paid to the manager
as shown below:
The firm’s profit ¼ $40 project cash flows e the reported cost
amount of the implemented project e bonus paid to the manager
This firm profit calculation makes clear to the manager that the
range of possible firm profits is higher when their report causes the
project with the lowest actual cost to be implemented. Except for
the manager’s opportunity to create slack for personal financial
benefit and the related effect on the manager’s payoff and firm
profit described above, all other procedures and parameters
described earlier for the Report condition are the same for the
ReportSlack condition.
3.6. Additional payoff procedures e all conditions
Before each experimental session began, participants were
informed that at the conclusion of the experimental session, one
period would be selected at random to be the payment period, and
all participants except for one would be paid based on the payoff
that they earned in their role as a manager for that period. How-
ever, to ensure that the participants felt that the impact of their
actions on the firm’s profit was real, they were also informed prior
to the experimental session that one participant for that session
would be randomly chosen to be paid the average firm profit for the
randomly selected payment period rather than the payoff they
earned as a manager.12

11
Panel B of Table 2 provides a range of possible manager payoffs rather than a
single payoff because the manager’s payoff depends not only on which project is
implemented, but also on how much slack the manager builds into his or her report
(i.e., the amount by which the reported cost exceeds the actual cost for the project
that will be implemented).
12
The average firm profit that was paid to the randomly selected participant
excluded the firm profit from that participant. This was done to ensure that par-
ticipant’s choices in the experiment could not reflect self-interested concerns for
the firm’s payoff.

8
P.R. Martin Accounting, Organizations and Society xxx (xxxx) xxx

Fig. 2. Frequency of project implementation by project type and by condition.

Table 3
Panel A: Project frequency by cost e NoReport condition.
4. Results
Project Implementeda CSR Higher Costc Non- CSR Higher
Costd
4.1. Descriptive statistics
N % N %
Fig. 2 and Table 3 show the frequency with which managers CSR 153 47.2% 303 93.5%
chose to implement a higher cost project by project type for all Non-CSR 171 52.8% 21 6.5%
three conditions. Fig. 2, Table 3, and the primary analyses reported Total 324 100% 324 100%
in this paper do not include information from the cost pairs that Panel B: Project Frequency by Cost e Report Condition
include a project cost of $20 because these cost pairs do not allow Project Implementedb CSR Higher Costc Non- CSR Higher
managers in the Report and ReportSlack conditions to demonstrate Costd
N % N %
a preference for the CSR project.13 Fig. 2 and Table 3 show that
managers in all three conditions chose to implement a higher cost CSR 72 22.2% 308 95.1%
Non-CSR 252 77.8% 16 4.9%
CSR project much more frequently than a higher cost non-CSR
Total 324 100% 324 100%
project. Fig. 2 and Table 3 also show that the frequency with
Panel C: Project Frequency by Cost e ReportSlack Condition
which managers chose to implement a higher cost CSR project is
Project Implementedb CSR Higher Costc Non- CSR Higher
47.2% in the NoReport condition, 22.2% in the Report condition and Costd
36.1% in the ReportSlack condition. N % N %
H1 predicts that managers will favor CSR investments over non-
CSR 117 36.1% 315 97.2%
CSR investments even when doing so reduces their personal wealth Non-CSR 207 63.9% 9 2.8%
and firm profit. Because managers in the NoReport condition can make Total 324 100% 324 100%
recommendations for lower profit CSR investments without mis- a
In the NoReport condition, the project that was implemented was the project
reporting and do not have the opportunity to create slack, this con- that was recommended by the manager. The manager could recommend either the
dition allows me to isolate the manager’s preferences for CSR CSR project or the non-CSR project, regardless of which project had the higher cost.
b
investments without the complicating factors of honesty preferences In the Report and ReportSlack conditions, the project that was implemented was
the project with the lower reported cost. These tables includes only instances in
and the opportunity to create slack. As shown in Fig. 2 and Panel A of
which a manager could report either the CSR or the non-CSR as having the lower
Table 3, managers recommended a higher cost CSR project in the cost, regardless of which project actually had the lower cost.
NoReport condition 47.2% of the time (153 out of 324 opportunities).14 c
This column represents instances in which the CSR project had the higher actual
In comparison, managers recommended a higher cost non-CSR cost. Exactly one-half of the time the CSR project had the higher actual cost and one-
half of the time the non-CSR project had the higher actual cost.
project for implementation only 6.5% of the time (21 out of 324 op- d
This column represents instances in which the non-CSR project had the higher
portunities). Because the cost signals were equally balanced across actual cost. Exactly one-half of the time the non-CSR project had the higher actual
the two types of projects, this comparison of recommendation cost and one-half of the time the CSR project had the higher actual cost.

frequencies isolates the preferences managers have for CSR

investments.
13
The cost pairs that include a project with a cost of $20 were included in the I formally test H1 by comparing how often managers recom-
experiment to ensure that the type of project implemented did not influence the mended a higher-cost CSR project to how often they recommended
amount of slack created. Because managers in these instances could not misreport
a higher cost non-CSR project using a logistic regression with
to get the higher cost project implemented, an analysis of the amount of slack
created across the project types for these cost pairs could not be influenced by HighCost as the dependent variable and CSR as the independent
anything other than the type of project being implemented. Statistical analysis (not variable.15 HighCost equals one (zero) if the project with the higher
tabulated) shows that the amount of slack does not differ by project type when the
cost pair includes a project with a cost of $20 (t ¼ 0.73, p ¼ .47).
14
The 324 opportunities refer to the total number of times participants had the
15
opportunity to implement a higher cost CSR project in each condition. (36 subjects To control for the fact that subjects in my study made decisions in several
in each condition *9 times each participant was shown a higher cost CSR project periods, standard errors for all tests reported in my study are estimated using
that they could chose to implement ¼ 324). Huber-White corrected standard errors clustered by subject.

9
P.R. Martin Accounting, Organizations and Society xxx (xxxx) xxx

Table 4
Tests of hypotheses 1e3.

Test of H1:

HighCosta ¼ a1 þ a2CSRb þ ε

Coefficient z-value p-valuef

Constant 2.01 4.20 0.00

CSRb 1.02 2.36 0.01
Wald Chi2 5.59
Number of observations 756

Test of H2:
HighCostCSRc ¼ a1 þ a2Reportd þ ε
Coefficient z-value p-valuef

Constant 0.11 0.49 0.63

Reportd 1.14 3.20 0.00
Wald Chi2 10.25
Number of observations 648

Test of H3:
HighCostCSRa ¼ a1 þ a2ReportSlacke þ ε
Coefficient z-value p-valuef

Constant 1.25 4.57 0.00

ReportSlackc 0.68 1.82 .035
Wald Chi2 3.31
Number of observations 648
a
HighCost is an indicator variable that equals one (zero) if the project with the higher actual cost (lower actual cost) is implemented based on the manager’s recom-
mendation or report.
b
CSR is an indicator variable that equals one (zero) if the CSR project (Non-CSR project) is implemented based on the manager’s recommendation or report.
c
HighCostCSR is an indicator variable that equals one (zero) if the higher cost CSR project was (was not) is implemented based on the manager’s recommendation or report.
d
Report is an indicator variable that equals one (zero) if the observation is in the Report (NoReport) condition.
e
ReportSlack is an indicator variable that equals one (zero) if the observation is in the ReportSlack (Report) condition.
f
p-values are estimated using Huber-White corrected standard errors clustered by participant.

actual cost (lower actual cost) is recommended, and CSR equals one
(zero) if the CSR project (Non-CSR project) is recommended. As
shown in the test of H1 in Table 4, CSR is positive and significant
(z ¼ 2.36, p ¼ 0.01), providing support for H1.16 That is, managers in
the NoReport condition were much more likely to recommend a
higher cost CSR project than a higher cost non-CSR project,
demonstrating that they have preferences for CSR investments.
The statistical support for H1 reported above is not driven by a
small number of participants. Thirty-one of the 36 participants in
the NoReport condition (86.1%) chose to recommend a higher-cost
CSR project at least once, with 14 of those participants (38.9%)
doing so more than 50% of the time (not tabulated). Data from a
post experiment question provides further evidence that partici-
pants in the NoReport condition knowingly recommended a higher
cost CSR project for implementation because they valued the so-
cietal benefits associated with the CSR project. Specifically, partic-
ipants rated their willingness to contribute to environmental
causes on a 7-point Likert scale with end points of zero (Not
Willing) and 6 (Very High Willingness) and a midpoint of 3
(Moderate Willingness). Their responses to this question are
significantly positively associated (z ¼ 4.24, p < .001) with the
frequency with which they recommended the higher cost CSR
project for implementation (not tabulated). This provides further
evidence that manager’s recommendations reflected their prefer-
ences for the societal benefits associated with CSR investments.17
16
Because I make a directional prediction in H1-H4 all p-values reported for my
tests of H1-H4 are one-tailed p-values.
17
This effect is present in all three conditions. That is, responses to this post
experiment question in both the Report and the ReportSlack conditions are also
significantly positively associated with the frequency with which the managers
reported to implement a higher cost CSR project.
4.2. Tests of H2
H2 predicts that honesty preferences will decrease the fre-
quency with which managers act on their preference for CSR in-
vestments. To test H2, I compare the frequency of higher cost CSR
project implementation in the Report condition (where managers
must misreport to cause a higher cost CSR project to be imple-
mented) to the frequency in the NoReport condition (where man-
agers do not need to misreport to cause a higher cost CSR project to
be implemented). As shown in Fig. 2 and Panel B of Table 3, man-
agers in the Report condition chose to misreport to implement a
higher cost CSR project 22.2% of the time (72 out of 324 opportu-
nities). In contrast, recall that the rate of higher cost CSR project
implementation was 47.2% in the NoReport condition.
I formally test H2 by using a logistic regression with HighCostCSR
as the dependent variable and Report as the independent variable.
HighCostCSR equals one (zero) if the higher cost CSR project is (is
not) implemented based on the manager’s recommendation or
report, and Report equals one (zero) if the observation is in the
Report (NoReport) condition. As shown in the test of H2 in Table 4,
Report is negative and significant (z ¼ 3.20, p < .001), providing
evidence in support of H2. That is, these results provide evidence
that honesty preferences reduce managers’ willingness to act on
their preferences for CSR investments because managers in the
Report condition who needed to misreport to cause a higher cost
CSR project to be implemented were significantly less likely to do
so than lower-level managers in the NoReport condition who did
not need to misreport to cause a higher cost CSR project to be
implemented.
Although managers’ behavior in the experiment provides the
strongest evidence that preferences for honesty reduced the fre-
quency of higher cost CSR in the Report condition as compared to
the NoReport condition, data from a post experiment question
provide additional support for this interpretation. Participants in

10
P.R. Martin
the Report condition indicated the extent to which their reporting
choices were influenced by a desire to report honestly on a 7-point
Likert scale with endpoints of zero (No Influence) and 6 (Very High
Influence), and a midpoint of 3 (Moderate Influence). The responses
were significantly negatively correlated (z ¼ 4.65, p < .001) with
how often a participant misreported to implement a higher cost
CSR project (not tabulated). This supports the conclusion that in-
dividuals’ preferences for honesty reduced their willingness to
misreport to implement a higher cost CSR project.
4.3. Tests of H3
As discussed earlier, the presence of information asymmetry
between the manager and their superior regarding project costs
not only allows the manager to misreport which project has the
lower cost, it would typically also allow the manager to build slack
into their report for personal financial gain.
H3 predicts that the ability to create slack will increase man-
agers’ willingness to act on their preferences for CSR investments.
To test H3, I compare the frequency of higher cost CSR project
implementation in the ReportSlack condition (where managers can
build slack for personal financial benefit into their reports) to the
frequency in the Report condition (where managers cannot build
slack for personal financial benefit into their reports). As shown in
Fig. 2 and Panel C of Table 3, the rate of higher cost CSR project
implementation in the ReportSlack condition was 36.1% (117 out of
324 opportunities). In contrast, recall that the rate of higher cost
CSR project implementation was only 22.2% in the Report condition.
I formally test H3 by using a logistic regression with HighCostCSR as
the dependent variable and ReportSlack as the independent vari-
able. HighCostCSR equals one (zero) if the higher cost CSR project is
(is not) implemented based on the manager’s report, and Report-
Slack equals one (zero) if the observation is in the ReportSlack
(Report) condition. As shown in the test of H3 in Table 4, ReportSlack
is positive and significant (z ¼ 1.82, p ¼ .035), providing evidence
that the frequency of higher cost CSR project implementation is
higher in the ReportSlack condition than the Report condition. In
other words, these results suggest that the ability to build slack for
personal financial benefit into reports increases the willingness of
managers to act on their preferences for CSR by misreporting to
implement a higher cost CSR project.18
4.4. Tests of H4
H4 predicts that managers whose reporting choices are domi-
nated by a preference for CSR (CSR types) will generate higher firm
profit than managers whose reporting choices are dominated by a
preference for wealth. To test this hypothesis, I categorized
18
A possible reason for this finding is that the opportunity to create slack allows
managers to offset the personal cost of reporting in favor of higher cost CSR in-
vestments. If this is the case, managers’ payoffs when implementing the CSR project
should be higher in the ReportSlack condition than in the Report condition.
Consistent with this expectation, an untabulated comparison of the payoffs for
managers across these conditions when reporting in favor of higher cost CSR in-
vestments finds that managers’ payoffs were significantly higher (t ¼ 5.14, p < .001)
by an average of $1.73 in the ReportSlack condition than in the Report condition.
19
All but one of the managers who were classified as an Honest type created
0 slack in all instances. One manager who created an average of 17.5% of the
available slack but never caused a higher cost CSR project to be implemented was
also classified as an Honest type. In addition, all but one of the managers who were
classified as a Wealth type created 100% of the available slack in all instances. One
manager who took an average of 65.1% of the available slack but never caused a
higher cost CSR project to be implemented was also classified as a Wealth type. All
statistical inferences are unchanged if these two individuals are excluded from the
analysis.
11
Accounting, Organizations and Society xxx (xxxx) xxx
managers in the ReportSlack condition into three groups based on
the three preferences described above. Managers who never mis-
reported to implement a higher cost CSR project and who created
less than 50% of the available slack were classified as Honest types,
while managers who never misreported to implement a higher cost
CSR project but created more than 50% of the available slack were
classified as Wealth types.19 Finally, managers who chose to
implement a higher cost CSR project more than 50% of the time
were classified as CSR types.20
As shown in Table 5, based on these classifications, 7 of the 36
participants (19.4%) were classified as Honest types, 4 participants
(11.1%) were classified as Wealth types, and 10 participants (27.8%)
were classified as CSR types. Table 6 also reports the average
response to three post experiment questions that deal with pref-
erences for honesty, wealth, and CSR. Consistent with the classifi-
cations based on their behavior, Honest types gave the highest
average response on the post experiment question relating to
honesty (5.00). CSR types gave the highest average response to the
post experiment question related to CSR (5.30) and Wealth types
gave the second highest average response to the post experiment
question relating to wealth (0.00).
H4 predicts that firm profit will be higher for managers whose
reporting choices are dominated by a preference for CSR than for
managers whose reporting choices are dominated by a preference
for wealth. I test this prediction by comparing firm profit for CSR
types to firm profit for Wealth types. Fig. 3 shows that average firm
profit is higher for CSR types ($14.32) than for Wealth types
($11.93).21 Model 1 in Table 6 shows that average firm profit is
significantly higher (t ¼ 4.68, p < .001) for CSR types than for
Wealth types. This result is obtained despite the fact that the CSR
types reduce firm profit by implementing higher cost CSR projects
and Wealth types do not. This finding shows that firms can be
better off when managers have strong preferences for CSR rather
than strong preferences for wealth.
As shown in Table 5, these results supporting H4 are explained
by an analysis of the amount of slack for personal financial gain
created by CSR types versus the amount created by wealth types.
Consistent with the manner in which participants were classified
into types, the percentage of slack for personal gain was very high
for Wealth types (92.4%). Of primary interest in Table 5 is the
average percentage of slack for personal financial benefit created by
CSR types because in advance it was not clear how much slack they
would build into their reports. Model 2 in Table 6 provides a sta-
tistical test of the average percentage of slack across the CSR and
wealth types, showing that the average percentage of slack for the
CSR types (38.7%) is significantly lower (t ¼ 4.93, p < .001) than
the average percentage of slack for the Wealth types (92.4%). This
result helps to explain the results regarding firm profit presented
earlier because it shows that managers who have strong prefer-
ences for CSR create less slack for personal financial benefit than
managers who have strong preferences for wealth.
20
Because some individuals do not appear to have a dominant preference for
wealth, CSR or honesty, I classified 15 of the 36 participants in the ReportSlack
condition as “Weak CSR” types since these individuals chose to implement a higher
cost CSR project at least once but not more than 50% of the time. To ensure that my
results for H2 were not driven by my classification of CSR types, I repeated all re-
ported tests using the CSR and Weak CSR types combined in place of the CSR types
only and find that all statistical inferences are unchanged.
21
Fig. 3 also shows that, consistent with the classification of Honest types, Honest
types result in the highest average firm profit ($16.37). This result is due to the fact
that Honest types by definition do not reduce firm profit by misreporting for any
purpose.
P.R. Martin Accounting, Organizations and Society xxx (xxxx) xxx

Table 5
Types of managers in the ReportSlack condition.

N Frequency of Type Mean % Slacke Mean Response Honesty PEQf Mean Response CSR PEQg Mean Response Wealth PEQh

Types
CSRa 10 27.8% 38.7% 3.50 5.30 0.40
Weak CSRb 15 41.7% 56.6% 2.67 3.73 0.73

Total CSR Types 25 69.5% 49.4% 3.00 4.36 .028

Wealthc 4 11.1% 92.4% 0.25 0.25 0.00

Honestd 7 19.4% 2.6% 5.00 0.86 2.86

Total Participants 36 100% 45.1% 3.08 3.22 0.36

a
CSR types are defined as individuals who have reported to implement a higher cost CSR project more than one-half of the time.
b
Weak CSR types are defined as individuals who have reported to implement a higher cost CSR project at least once, but less than one half of the time.
c
Wealth types are defined as individuals who never reported to implement a higher cost CSR project and who created more than 50% of the slack available to them.
d
Honest types are defined as individuals who never reported to implement a higher cost CSR project and who created less than 50% of the slack available to them.
e
Mean % Slack is measured as ($total of slack/$ total slack available).
f
Participants were asked to rate their response to the question “To what extent was your reporting choice regarding the cost of the two projects influenced by a desire to
report honestly?” on a 7 point Likert scale with end points of zero “No Influence” and 6 “Very High Influence” and a midpoint of 3 “Moderate Influence.”
g
Participants were asked to rate their response to the question “To what extent was your reporting choice regarding the cost of the two projects influenced by a desire to
implement the green project?” on a 7 point Likert scale with end points of zero “No Influence” and 6 “Very High Influence” and a midpoint of 3 “Moderate Influence.”
h
Participants were asked to indicate the extent to which they agree with the following statement: “When the green project had the higher actual cost, I considered the
amount my possible payoff would be reduced in deciding whether to misreport to get the green project implemented” on a 7 point Likert scale with end points of 3 “Strongly
Disagree” and 3 “Strongly Agree” and a midpoint of zero “Neither Agree nor Disagree.”

Table 6
Tests of hypothesis 4.

Model 1: FirmProfita ¼ a1 þ a2CSRTypeb þ ε

Coefficient t-value p-valued

Constant 11.93 35.05 0.00

CSRTypeb 2.39 4.68 0.00
F-value 21.91
Number of observations 336

Model 2: Slackc ¼ a1 þ a2CSRTypeb þ ε

Coefficient t-value p-valued

Constant 0.92 13.43 0.00

CSRTypeb 0.54 4.93 0.00
F-value 24.26
Number of observations 336
a
FirmProfit is the amount of firm profit in the ReportSlack condition.
b
CSRType is an indicator variable that equals one (zero) if the manager is classified as a CSR (Wealth) type.
c
Slack is the percentage of slack for personal benefit the manager built into their report in the ReportSlack condition.
d
p-values are estimated using Huber-White corrected standard errors clustered by participant.

Fig. 3. Average firm profit by manager type in the ReportSlack condition.

12
P.R. Martin
4.5. Additional analysis
The NoReport condition was designed as a control condition to
capture managers’ willingness to act on their own personal CSR
preferences. However, this important design choice to isolate
managers’ personal CSR preferences does not preclude the possi-
bility that managers’ choices in this setting could reflect their in-
ferences about the firm’s preferences for CSR projects. Also, because
both the Report and ReportSlack conditions use a decision rule that
maximizes firm profit using the manager’s report, the superior’s
preferences for higher firm profit are more explicit in the Report
and ReportSlack conditions than in the NoReport condition. These
concerns provide a potential alternative explanation for H1 (that
the NoReport condition reflects managers’ inferences about the
superior’s preferences) and H2 (that a comparison of the NoReport
and Report conditions could reflect differences in managers’ ex-
pectations of the superior’s preferences for CSR projects versus firm
profit across these conditions).
To rule out this alternative explanation for H1 and H2, I con-
ducted a second experiment in which the superior’s preferences
were explicitly stated in both the NoReport and Report conditions.
That is, I reran both the NoReport and Report conditions while
making the superior’s preferences explicit by adding the following
sentence to the instructions: “Because your superior wants to
maximize firm profit they would prefer to implement the project
with the lowest actual costs”.22 The results for Experiment 2 are
shown in Table 7.23 As shown in Panel B of Table 7, repeating the
statistical tests for H1 and H2 using the data from Experiment 2
replicates the results from the original experiment (test of H1:
z ¼ 2.64, p ¼ 0.004; test of H2: z ¼ 1.36, p ¼ 0.088). Because these
results are consistent with those from the original experiment, they
help to rule out the alternative explanation that the results re-
ported previously for H1 and H2 were driven by managerial in-
ferences about their superior’s preferences in the NoReport
condition.
I also provide additional analysis regarding whether preferences
for CSR projects are impacted by how much higher the cost of such
projects are than the non-CSR alternative. As shown in Table 8, the
frequency of higher cost CSR project implementation decreased in
all conditions when the cost of the CSR project increased relative to
the non-CSR project. A logistic regression in which the dependent
variable is whether the higher cost CSR project was implemented
(yes or no), and the dichotomous independent variable is the cost of
the CSR project, shows a negative and significant (z ¼ 3.96;
22
Because experiment 2 was conducted using Mturk participants rather than
student participants in a computer lab, several minor changes were made to adapt
the experiment for Amazon Mturk. Specifically, the number of periods was short-
ened from 24 to 12, an experimental currency (lira) was used and subsequently
converted to US dollars for payment to participants, and all participants’ payments
were based on the choices they made in their role as a manager in the experiment.
All other instructions, wording, examples, choices, payoff formulas, etc. were the
same as in the original experiment.
23
The results reported in Table 7 reflect the responses for participants who
showed that they understood their superior’s preferences by answering a post
experimental question correctly by noting that the instructions stated that “your
superior would have preferred to always implement the project with the lowest
actual cost.”
24
In a similar fashion it is possible that the size of the benefits to the green cause
relative to the cost to the manager would also affect managers tendency to act on
their preferences for the CSR investment. In this study the size of the benefit to the
green cause was always 50% of the cost of any CSR project implemented. While this
parameter choice reflects the fact that in the real world a manager’s CSR choices
within the firm are likely to have larger societal effects than the personal cost of
such choices, subsequent studies could examine to what extent the relative cost
and benefits of CSR activities affects managers’ tendency to act on their preferences
for CSR.
13
Accounting, Organizations and Society xxx (xxxx) xxx
p < .001) relation between the cost of the CSR project and the
frequency with which it was implemented (not tabulated). These
results show that managers respond in a predictable manner to
how costly it is to act on their preferences for CSR activities
(managers are less likely to act on their preferences as the cost of
doing so increases).24 However, as shown in Table 8, a significant
portion of managers in all three conditions continued to recom-
mend or report to have the higher cost CSR project implemented
even when the cost of the CSR project increased from 10% to 50%
higher than the non-CSR alternative.
5. Conclusion
My study examines the implications of potential CSR in-
vestments in a capital budgeting setting. I conduct an experiment
to investigate whether managers have preferences for CSR in-
vestments, and the factors that influence their willingness to act on
any such preferences. I first establish that managers demonstrate
preferences for CSR investments even when they have financial
incentives not to do so. I then provide evidence that honesty
preferences decrease managers’ willingness to act on their prefer-
ences for CSR investments, but the ability to create slack for per-
sonal financial benefit increases managers’ tendency to act on their
CSR preferences. Finally, I provide evidence that although firm
profit is negatively affected by managers’ preferences for CSR in-
vestments, firm profit can nevertheless be higher when managers
have strong preferences for CSR than when they have strong pref-
erences for wealth.
My study contributes to the capital budgeting literature in ac-
counting by incorporating the potential for CSR investments to
activate social norms that can influence such investment decisions.
Previous research has examined various factors that can influence
managers’ reporting in capital budgeting settings, including pref-
erences for wealth, honesty, fairness, and reciprocity (Brown, Evans
and Moser 2009; Douthit & Stevens, 2015). My study adds to this
literature by providing evidence that preferences for CSR can also
play a role in managers’ reporting behavior in capital budgeting
settings.
My findings add to our understanding of how CSR decisions are
made within firms. Specifically, my results show that accounting
information used to make CSR decisions reflects managers’ pref-
erences for CSR investments. Upper-level decision makers may not
expect the information they receive to reflect managers’ personal
CSR preferences particularly when managers have financial in-
centives not to act on such preferences. Because upper-level deci-
sion makers may want to make CSR decisions based on their own
preferences, they are likely to find it valuable to know that the
information provided to them to make CSR decisions already in-
corporates their manager’s personal preferences for CSR activities.
Although it may seem that upper-level decision makers and
shareholders who would prefer to maximize firm profit would not
desire to have a manager whose personal CSR preferences result in
the implementation of lower-profit CSR projects, my findings
regarding firm profit suggest that in some cases they may prefer
such an outcome. That is, I find that firm profit can be higher when
managers have a strong preference for CSR than when they have a
strong preference for wealth. This occurs because managers with
strong preferences for CSR create less slack than managers with
strong preferences for wealth, and this effect can more than offset
the negative impact of implementing higher-cost CSR projects on
firm profit.
My study is subject to limitations that offer avenues for future
research. First, participants were business students and not
currently practicing managers. While two-thirds of participants
were graduate business students with significant work experience,
P.R. Martin Accounting, Organizations and Society xxx (xxxx) xxx

Table 7
Experiment 2.

Panel A: Project Frequency by Cost

New NoReport Condition e with explicit superior preference for lower cost project

Project Implementeda CSR Higher Costc Non- CSR Higher Costd

N % N %

CSR 43 22.4% 183 95.3%

Non-CSR 149 77.6% 9 4.7%
Total 192 100% 192 100%

New Report Condition e with explicit superior preference for lower cost project
Project Implementedb CSR Higher Costc Non- CSR Higher Costd
N % N %

CSR 27 12.9% 197 93.8%

Non-CSR 183 87.1% 13 6.2%
Total 210 100% 210 100%

Panel B: Test of H1 with explicit superior preferences: HighCoste ¼ a1 þ a2CSRf þ ε

Coefficient z-value p-valuei

Constant 2.80 5.07 <.001

CSRf 1.36 2.64 .004
Wald Chi2 7.00
Number of observations 384

Test of H2 with explicit superior preferences: HighCostCSRg ¼ a1 þ a2Reporth þ ε

Coefficient z-value p-valuei

Constant -.572 0.74 .462

Honestyh -.335 1.36 .088
Wald Chi2 1.84
Number of observations 402
a
In the New NoReport condition, the project that was implemented was the project that was recommended by the manager. The manager could recommend either the CSR
project or the non-CSR project, regardless of which project had the higher cost.
b
In the New Report condition, the project that was implemented was the project with the lower reported cost. These tables includes only instances in which a manager could
report either the CSR or the non-CSR as having the lower cost, regardless of which project actually had the lower cost.
c
This column represents instances in which the CSR project had the higher actual cost. Exactly one-half of the time the CSR project had the higher actual cost and one-half of
the time the non-CSR project had the higher actual cost.
d
This column represents instances in which the non-CSR project had the higher actual cost. Exactly one-half of the time the non-CSR project had the higher actual cost and
one-half of the time the CSR project had the higher actual cost.
e
HighCost is an indicator variable that equals one (zero) if the project with the higher actual cost (lower actual cost) is implemented based on the manager’s recom-
mendation or report.
f
CSR is an indicator variable that equals one (zero) if the CSR project (Non-CSR project) is implemented based on the manager’s recommendation or report.
g
HighCostCSR is an indicator variable that equals one (zero) if the higher cost CSR project was (was not) is implemented based on the manager’s recommendation or report.
h
Report is an indicator variable that equals one (zero) if the observation is in the Report (NoReport) condition.
i
p-values are estimated using Huber-White corrected standard errors clustered by participant.

Table 8
Frequency of Higher Cost CSR Project Implementation by Cost of CSR project and Experimental Condition.

NoReport Report ReportSlack Average e All Conditions

$11 (10% higher than non-CSR cost of $10)a 74.1% (80/108) 36.1% (39/108) 56.5% (61/108) 55.6% (180/324)
$13 (30% higher than non-CSR cost of $10)b 38.9% (42/108) 18.5% (20/108) 29.6% (32/108) 29.0% (94/324)
$15 (50% higher than non-CSR cost of $10)c 28.7% (31/108) 12.04% (13/108) 22.2% (24/108) 21.0% (68/324)
Overall e by condition 47.2% (153/324) 22.2% (72/324) 36.1% (117/324) 35.2% (342/972)
a
When the actual cost of the CSR project was $11, the actual cost of the CSR project was $1 higher than the actual cost of the non-CSR project ($11e10)and 10% higher than
the actual cost of the non-CSR project ($1/$10).
b
When the actual cost of the CSR project was $13, the actual cost of the CSR project was $3 higher than the actual cost of the non-CSR project ($13e10)and 30% higher than
the actual cost of the non-CSR project ($3/$10).
c
When the actual cost of the CSR project was $15, the actual cost of the CSR project was $5 higher than the actual cost of the non-CSR project ($15e10)and 50% higher than
the actual cost of the non-CSR project ($5/$10).

and the remaining participants were upper-level business majors
who are likely to hold manager positions in the near future,
different groups of practicing managers could have unique back-
ground and experience that may affect their mix of preferences for
wealth, honesty, and CSR. Future research could examine the extent
to which managers’ background and experience might affect my
findings.
Second, the socially responsible cause in my study was a “green”
cause. Other socially responsible causes could result in stronger or
weaker effects depending on the strength of managers’ preferences
for those causes. Future research could examine whether and how
managers respond to capital investments involving other types of
CSR activities. Third, because my focus was on establishing the ef-
fects of lower-level managers’ CSR preferences on their decisions, I
did not allow for strategic interaction between lower-level man-
agers and their superiors. Future research could examine the effect
of such interactions. Finally, I examine how two of the most com-
mon factors in capital budgeting settings, honesty and the ability to

14
P.R. Martin
create slack, affect the extent to which managers act on their per-
sonal preferences for CSR. Future research could examine the effect
of other factors such as distributional fairness, the manager’s
relationship with their superior, and the form and type of control
system.
Acknowledgements
I thank the chair of my dissertation committee, Don Moser, for
his guidance throughout this project. I also thank the other mem-
bers of my committee, Jake Birnberg, Harry Evans, Lynn Hannan
and Vicky Hoffman for their helpful comments and suggestions.
This paper also benefited from the helpful comments of Vic Anand,
Nathalie Beckers, Daniel Beneish, Jason Brown, Eric Chan, Clara
Chen, Willie Choi, Jeff Clark, Brooke Elliott, Jeff Hales, Bob Libby,
Andrew Newman, Mark Peecher, Geoff Sprinkle, Bryan Stikeleather,
Terry Warfield, Arnie Wright, Aaron Zimbelman, and workshop
participants at the University of Pittsburgh, Georgia Institute of
Technology, University of Illinois, Indiana University, University of
Wisconsin, Chapman University, Northeastern University, Cornell
University, the 2013 Management Accounting Section Mid-year
Meeting and the 2014 Spring Camp at Tilburg University. I am
grateful for the financial support for this study provided by the
David Berg Center for Ethics and Leadership and the Deloitte
Foundation.
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