Firms are under increasing pressure to implement effective internal whistleblowing systems. While firms can provide incentives to encourage internal whistleblowing, it remains controversial how such incentives should be structured. We examine whether the effectiveness of incentives encouraging internal whistleblowing is a joint function of the framing of such incentives (reward or penalty) and the strength of descriptive norms supporting internal whistleblowing. We predict and find in a lab experiment that penalties lead to a greater increase in internal whistleblowing (compared to rewards) when descriptive norms supporting whistleblowing are stronger. Our study contributes to the previous accounting literature on dishonesty and the role of management control systems design in promoting honesty and ethical norms in organizations. We also contribute to an emerging accounting literature on the links between controls, norms, and individual behavior by distinguishing between descriptive norms and injunctive norms and by highlighting the interplay between these two types of norms. Our results have important implications for organizations considering adopting incentives to encourage internal whistleblowing.

Prior studies have documented the asymmetrical behavior of selling, general and administrative (SG&A) costs (i.e., SG&A costs increase more when activity rises than they decrease when activity falls), and have explained this phenomenon primarily with economic factors. Drawing on agency theory, we argue that SG&A cost asymmetry is driven not only by economic factors but also by the agency problem which causes a shift in SG&A cost asymmetry away from its optimal level. Using data for S&P 1500 firms over the period 1996–2005, we find that the degree of SG&A cost asymmetry is positively associated with managers’ empire building incentives due to the agency problem (measured by free cash flow and CEO horizon, tenure, and compensation structure), suggesting that the agency problem provides an additional explanation for SG&A cost asymmetry. Moreover, we find that strong corporate governance mitigates the positive association between the agency problem and the degree of SG&A cost asymmetry. In additional analyses, we also find that the agency problem influences cost stickiness to a greater extent in mature firms and in firms where SG&A costs create low future value.