Formal control systems are a common instrument to align employees’ interests with those of managers and companies. However, research shows that employees perceive formal controls as a sign of distrust and restraint, which can lead to costs of control in the form of lower employee cooperation and effort. We propose that charitable giving reduces these costs of control. We draw on the halo effect and propose that corporate charitable giving alters employees’ perception of and reaction to formal controls. In a (...) laboratory experiment, we find that charitable giving by a company creates a higher level of employee trust in a manager who decides to implement a control and a more positive assessment of formal control. These positive effects of charitable giving lead to lower costs of control compared to the absence of charitable giving. We thereby provide an example of how charitable giving as a corporate social responsibility activity yields positive benefits by altering the behavior of internal company stakeholders. (shrink)

Companies disclosing negative aspects in sustainability reports often employ legitimation strategies to present mishaps in a favorable light. In incentivized experiments, we find that nonprofessional investors divest from companies with a negative sustainability-related incident, and that symbolic legitimation (which only evasively explains a negative incident) is not a strong enough signal to counter this divestment behavior. Even substantial legitimation (which reports on measures and behavioral change) mitigates the divestment decisions only if the company reports on concrete remediation actions in morally (...) charged situations, such as social or environmental incidents. We elaborate these results in light of signaling and screening theory, and suggest the conceptual extension of “costly signals” to what we call “valuable signals.” We argue that valuable signals need be not only costly for the sender from an economic perspective but also perceived as appropriate by the receiver from a noneconomic perspective. (shrink)