The influence of self-interest and ethical considerations on managers' evaluation judgments

Recent empirical studies support self-interest as the sole basis for econom ic decisions (as predicted by agency theory). However, cognitive moral deve lopment (CMD) theory suggests that decision makers will allow ethical/moral considerations to constrain their economic behaviour. The purpose of this study is to resolve the essential conflict between the tenets of agency the ory and CMD theory. The results of a laboratory experiment suggest that bot h moral reasoning level and adverse-selection conditions (self-interest) ca n have a significant effect on managers' project evaluation decisions. Spec ifically, managers are likely to continue a project that is expected to be unprofitable only when adverse selection conditions are present and moral r easoning level is low. Thus, agency theory may not be generalizable to acco unting-based economic performance. (C) 1999 Elsevier Science Ltd. All right s reserved.