Received: 23 October 2019 Revised: 29 September 2020 Accepted: 8 October 2020

DOI: 10.1002/csr.2070

RESEARCH ARTICLE

The effect of managerial ability on corporate social

responsibility and firm value in the energy industry

Yujing Gong1 | Cheng Yan2 | Kung-Cheng Ho3

1
Wenlan School of Business, Zhongnan
University of Economics and Law, China Abstract
2
School of Economics, Zhejiang University of We investigate the role of managerial ability in the relationship between corporate
Technology, China
social responsibility (CSR) and firm performance in the energy industry, where sus-
3
Pearl River Delta Collaborative Innovation
Center of Scientific Finance and Industry, tainability issues are of special interest. We first identify a positive association
Institute of Regional Finance, Guangdong between CSR and firm value, which, however, disappears when considering manage-
University of Finance & Economics, China
rial ability. Only the MA-associated components of CSR increases energy firms' value.
Correspondence Finally, managers with superior ability can still efficiently implement CSR activities to
Kung-Cheng Ho, Pearl River Delta
Collaborative Innovation Center of Scientific foster firm value during the financial crisis. Taken together, these results suggest that
Finance and Industry, Institute of Regional higher managerial ability is a crucial certification of the benefit of CSR investment,
Finance, Guangdong University of Finance &
Economics, China. which in turn improves firm value, particularly during unstable periods.

Funding information KEYWORDS

National Natural Science Foundation of China,
CEO, CSR, energy industry, financial crisis, firm performance, firm value, investment,
Grant/Award Number: 71903199; Zhejiang
Provincial Natural Science Foundation of managerial ability
China, Grant/Award Number: (LZ20G010002);
National Social Science Fund of China number,
Grant/Award Number: (19ZDA061,
19AJY027); Department of Education of
Guangdong Province, Grant/Award Number:
2020WTSCX024

“CSR/CSP is different among different industrial companies”.
Gao (2009)
1 | I N T RO D UC TI O N
Under the circumstances of sustainable development, the key objec-
tive for the energy industry is supplying energy resources that should
have minimal impacts on both the environment and society (Patari,
Arminen, Tuppura, & Jantunen, 2014). Energy firms are thus expected
to be profitable and responsible at the same time. Accordingly, to
maintain the operating license, energy firms must put more effort into
corporate social responsibility (CSR)1 (e.g., Streimikiene,
Simanaviciene, & Kovaliov, 2009). However, the economic costs of
energy firms are increasing sharply alongside their engagement in CSR
activities, which negatively affects firm value (Patari et al., 2014). . It is
likely to be inconsistent with the initial goal of CSR engagement
(i.e., the long-term firm value maximization). Therefore, investigating
how and to what extent CSR affects energy firms' performance
becomes more essential.
However, few empirical studies are examining the CSR-firm perfor-
mance issue in the energy industry.2 Our study contributes to the literature
by using a relatively large sample of energy firms in a longer period. More-
over, the effect of CSR on firm value remains debatable, as the results from
the extant CSR literature are inconclusive.3 One concern related to this
issue is that most studies compare the financial performance of socially
responsible firms that do not meet the same CSR criteria (Lo &
Sheu, 2007; Patari et al., 2014). Our sample setting focuses on a specified
industry where firms must follow strict CSR guidelines and conventions,
especially the standards about environmental protection (Arslanayaydin &
Thewissen, 2016) and sustainable development (Patari, Jantunen,
Kylaheiko, & Sandstrom, 2012), which can alleviate this concern.4
Another concern is that the potential missing links exist between
CSR and firm performance. Previous studies state that the new challenge
for energy firms becomes balancing the economic benefits of CSR with
its costs (see, for example, Streimikiene et al., 2009; Patari et al., 2014).

Corp Soc Responsib Environ Manag. 2020;1–14. wileyonlinelibrary.com/journal/csr © 2020 ERP Environment and John Wiley & Sons Ltd. 1
2 GONG ET AL.
Due to alleviated career concerns, chief executive officers (CEOs) with
the higher managerial ability (MA) can adequately capture and implement
the benefits of CSR (Yuan, Tian, Lu, & Yu, 2019). Higher MA is also
suggested as a certification of firm value to outside investors, thus reduc-
ing information asymmetry between insiders and outsiders and achieving
a relatively low cost of capital (Andreou, Karasamani, Louca, &
Ehrlich, 2017; Chemmanur & Paeglis, 2005).
To address the second concern, we propose the MA of CEOs as a
missing link to explain the relationship between CSR and firm perfor-
mance. To test this conjecture, we adopt the measure of MA developed
by Demerjian, Lev, and Mcvay (2012). This measure captures how effi-
ciently managers can transform corporate resources into revenue rela-
tive to their industry peers, reflecting management-specific factors more
precisely and is considered a better measure of MA (see, for example,
Koester, Shevlin, & Wangerin, 2017; Lee, Wang, Chiu, & Tien, 2018).
Using a large sample of US energy firms operating in the
1992–2013 period, our preliminary results show that the effect of CSR
on firm performance is significant and positive. However, when consid-
ering MA in the model, the coefficient of CSR becomes statistically
insignificant, whereas the coefficient of MA is consistently positive and
statistically significant. This suggests that the factor of MA is missing in
previous studies that examined the CSR-firm performance relationship.
To further investigate to what extent MA affects the CSR-firm per-
formance relationship, we separate CSR into MA-associated compo-
nents, which are measured as the fitted values of CSR explained by
MA, and non-MA-associated components (Callen, Khan, & Lu, 2013;
Gong, Ho, Lo, Karathanasopoulos, & Jiang, 2019). We find that only
the MA-associated component of CSR has a significantly positive
effect on firm performance, suggesting that the CSR–firm performance
relationship depends mainly on the factor of MA. In particular, high-
CSR firms see greater benefits if they have superior ability managers.
Previous literature states that the 2007–2008 financial crisis heavily
affects the financial performance of energy firms (Bagirov &
Mateus, 2019; Berk & Rauch, 2016; Dayanandan & Donker, 2011).
Investigate whether the combined effect of MA and CSR can foster
firm value during periods of instability thus becomes essential. Besides
this, the exogenous shock of the financial crisis provides a natural
experimental setting to alleviate the endogeneity concerns of the rela-
tionships between CSR, MA, and firm value. Finally, we find that
energy firms can still benefit from better CSR performance during the
financial crisis if they employ managers with greater management abil-
ity before or during the crisis. The potential explanation for this phe-
nomenon is that such firms can gain deeper social trust and experience
less information asymmetry, highly valued by the unstable market.
We make several contributions to the extant literature. First,
although the energy industry plays a crucial role in sustainable devel-
opment and is the forerunner of CSR-related activities, few studies
have investigated the CSR-firm performance issue within this indus-
try. Compared with the extant literature,5 we construct a larger sam-
ple of energy firms across a longer period to examine this issue within
the context of the energy industry. Our results show that energy firms
can benefit more from better CSR performance. However, this posi-
tive effect strongly depends on the manager's MA.
Our second contribution is that we highlight the role of MA in the
relationship between CSR and firm performance. Without higher MA
managers, the marginal benefits of CSR do not significantly outweigh
the marginal costs in the energy industry. This sheds light on the alter-
native way in which CSR affects firm value and helps explain the con-
tradictory results in previous studies.6
Finally, we also contribute to recent literature that conjectures either
better pre-crisis MA or better pre-crisis CSR performance can foster firm
value during a financial crisis (Andreou et al., 2017; Lins, Servaes, &
Tamayo, 2016). Our findings emphasize that only CEOs with superior
ability can still efficiently implement their CSR investments to foster
energy firms' value, even during the financial crisis. This suggests that
superior MA is the certification of the benefits of CSR, especially when
the market suffers from greater uncertainty and social trust is low.
The remainder of this paper is organized as follows. Section 2
discusses the previous literature and develops three hypotheses.
Section 3 describes the data, sample, and variables. Section 4 presents
the empirical results, and Section 5 concludes the paper.
2 | LITERATURE REVIEW AND
HY P O T H E S E S D EV E L O P M EN T
This section reviews the relevant literature and develops three main
hypotheses for later examination.
2.1 | CSR and firm value
Extant studies find mixed evidence on the relationship between
CSR and financial performance (Bocquet et al., 2017; Hull &
Rothenberg, 2008; McWilliams, Siegel, & Wright, 2006; Perrini, Russo,
Tencati, & Vurro, 2011). The core debate is whether CSR activities
serve the best interests of the firm. Proponents of CSR suggest it can
increase shareholder value by aligning with stakeholders to enhance
customer loyalty and employee satisfaction and produce a favorable
corporate image (Carmeli, Gilat, & Waldman, 2007; Dowell, Hart, &
Yeung, 2000; Hillman & Keim, 2001; Luo & Bhattacharya, 2006). By
contrast, critics of CSR argue that firms attempt to serve stakeholders'
interests at the expense of shareholders and allocate resources away
from their core areas of business, resulting in lower profits (Cornell &
Shapiro, 1987; Friedman, 1970).
Among the proponents of CSR, McWilliams and Siegel (2000)
document the neutral impact of CSR on financial performance, where
the estimated model controls for the investment in research and
development (R&D). The authors argue that the lack of consensus in
the CSR-financial performance relationship is mainly attributable to
misspecified models. The moderating role of innovation has been fur-
ther confirmed by Hull and Rothenberg (2008). They suggest that the
effect of CSR on financial performance is stronger in low innovation
firms as well as in industries with little differentiation. Considering the
mediating effects of intangible resources, such as innovation, human
resources, reputation, and corporate culture, Surroca et al. (2010)
GONG ET AL.
suggest no direct relationship between corporate responsibility and
financial performance. Saeidi et al. (2015) further provide two media-
tors, namely reputation and competitive advantage, which potentially
influence the CSR-financial performance relationship.
In addition to the aforementioned static analyses, Tang
et al. (2012) construct a dynamic structure to investigate how a firm
can strategically engage in CSR activities to enhance its profitability.
They argue that an effective CSR engagement strategy should be con-
sistent, focus on related CSR dimensions, and adopt an internal-to-
external path. In summary, recent studies emphasize the indirect CSR-
financial performance relationship and state that there are several
missing links between CSR and financial performance.
2.2 | MA and firm value
Unlike the assumption of homogeneous managers in previous studies,
recent literature has begun recognizing the impact of managerial char-
acteristics and competencies on corporate policies and economic out-
comes. Bertrand and Schoar (2003) is the foundational paper for what
is referred to as “management style literature.” The authors document
that managers have varying managerial styles, which matter for a wide
range of corporate decisions related to firm performance. Based on
the certification effect of top managerial quality and reputation, Che-
mmanur and Paeglis (2005) provide evidence that firms with superior
management quality perform better before and after their initial public
offerings. This pattern holds for seasoned equity offerings as well
(Chemmanur, Paeglis, & Simonyan, 2010). The results of Chang,
Dasgupta, and Hilary (2010) further confirm the view that cross-
sectional differences in firm performance are associated with differ-
ences in CEOs' abilities. Focusing on private equity transactions,
Kaplan, Klebanov, and Sorensen (2008) find that firms with higher
general ability CEOs deliver a stronger performance.
However, Demerjian et al. (2012) argue that these measures of
MA cannot be attributed solely to managers or managerial fixed
effects. They hence develop a novel measure of MA, which captures
how efficiently managers can transform firm resources into revenues
compared with their industry peers.7 Koester et al. (2017) validate this
measure as a proxy for MA by investigating how managers can effi-
ciently manage corporate resources and corporate tax avoidance. Uti-
lizing this measure, Andreou et al. (2017) argue that firms with
stronger MA have better chances of accessing external financing
and thus mitigate underinvestment problems during a crisis, enhanc-
ing firm value. We, therefore, conclude that there is a positive
relationship between MA and firm performance.
2.3 | Case of the energy industry and hypotheses
development
Due to the nature of its operations, the energy industry is subject to
many specific CSR-related standards, guidelines, and conventions that
do not exist in other industries (Smolarski & Vega, 2013).
3
Sustainability issues are crucial for energy firms, and in turn, they are
also at the forefront of CSR-related activities (Hughey &
Sulkowski, 2012). Energy firms are thus expected to be profitable and
responsible at the same time. CSR is perceived as the greatest chal-
lenge facing the energy industry and further becomes a license for
operation (Streimikiene et al., 2009).
Despite the importance of CSR in the energy industry, previous
studies focusing on the CSR-firm performance link in this sector are
scarce. To the best of our knowledge, there are only three empirical
papers on this topic. Patari et al. (2014) use the Granger causality test
to investigate the causality between CSR and firm performance in the
energy industry. The other two are either limited to a smaller sample
(Arslanayaydin & Thewissen, 2016) or a much shorter sample period
(Patari et al., 2012). Nevertheless, they all indicate a positive relation-
ship between CSR and firm value in the energy industry. We thus
propose our first hypothesis:
HYPOTHESIS 1 High-CSR energy firms are expected to have strong
firm performance.
Both academics and practitioners emphasize that the economic
costs of energy firms are increasing sharply alongside their engage-
ment in CSR activities (Patari et al., 2014). Therefore, a new challenge
facing energy firms is balancing the economic benefits and costs
of CSR.
As discussed previously, superior CEOs tend to have a better
understanding of their firms' operations and industry trends (Demerjian
et al., 2012; Demerjian, Lev, Lewis, & Mcvay, 2013). This understanding
enables better alignment of corporate investment decisions with CSR
strategies, allowing these CEOs to more easily identify an optimal CSR
plan and efficiently implement this plan. Moreover, as the top execu-
tive, a CEO can create a “tone at the top” that emphasizes minimizing
costs with a given set of resources (Koester et al., 2017). Highly capable
CEOs of energy firms are expected to efficiently manage resources to
minimize the costs and maximize the benefits of CSR to achieve their
goal of providing relatively cheap green energy. This indicates that
higher MA acts as a guarantee of the benefits of CSR in energy firms.
We hence propose our second hypothesis:
HYPOTHESIS 2 The positive effect of CSR performance on energy
firms' value depends on MA.
To address the endogeneity concern, Lins et al. (2016) use the
financial crisis, serving as an exogenous shock on corporate policies,
to further investigate the relationship between CSR and firm perfor-
mance. They note that firms with high pre-crisis CSR ratings have
higher stock returns during the crisis period than those with low pre-
crisis CSR ratings. When it comes to the energy industry, however,
Arslanayaydin and Thewissen (2016) find that the market does not
reward socially responsible energy firms in times of high market
uncertainty. One potential reason is that the corporation's priority
during an unstable period is to maximize profits rather than invest in
CSR activities.
4 GONG ET AL.
As Andreou et al. (2017) suggest, the market still views crisis-
period corporate investment positively, but this effect is solely signifi-
cant for firms with strong pre-crisis MA. Specifically, firms with supe-
rior CEOs can still easily obtain external finances to implement their
investment projects, even during a financial crisis. The unstable mar-
ket should more highly value Their investment in CSR since they not
only mitigate severe underinvestment problems that emerge during
the period but also build stakeholder trust when social trust is low
(Andreou et al., 2017; Lins et al., 2016). We, therefore, deduce that
the benefits of CSR with superior MA are stronger when there is high
market uncertainty. Following the onset of the 2007–2008 financial
crisis, Berk and Rauch (2016) documents that the energy markets (par-
ticularly the oil and gas industry) become more volatile. Under such
high market uncertainty, the financial performance of energy firms
decreases sharply (Aydogan & Berk, 2012; Bagirov & Mateus, 2019;
Berk & Rauch, 2016; Dayanandan & Donker, 2011; Park &
Ratti, 2008). Our third hypothesis is as follows:
HYPOTHESIS 3 High-CSR energy firms benefit more from superior MA
during the financial crisis.
3 | SAMPLE AND VARIABLES
This section outlines our sample construction, and the main variables
will be used in the later empirical analysis.
3.1 | Data and sample selection
Our sample consists of listed firms in the energy industry (i.e., mines
(28), coal (29), and oil (30))8 (Broadstock et al., 2012; Dougal
et al., 2015) on the U.S. stock market during the 1992–2013 period.9
We use the comprehensive ratings from the Kinder, Lydenberg, and
Domini (KLD) database, which has been widely used in the recent
mainstream studies examining the effect of CSR on financial perfor-
mance (e.g., Deng, Kang, & Low, 2013; Servaes & Tamayo, 2013).10
Financial and CEO characteristic data are taken from the Compustat
database. After excluding firms with missing data, our final sample has
1,105 firm-year observations.
3.2 | Measures
3.2.1 | CSR measure
We use the CSR ratings provided by KLD, which evaluates a firm's
social performance across seven dimensions: community, corporate
governance, diversity, employee relations, environment, human rights,
and product quality and safety. For each category, there is a set of
binary variables relating to strengths and concerns. A firm is assigned
a value of 1 if it meets the criteria and 0 otherwise. Following
previous literature, we construct an overall CSR measure that adds
strengths and subtracts concerns scores across these seven KLD
dimensions (El Ghoul, Guedhami, Kwok, & Mishra, 2011; Jiao, 2010;
Jo & Harjoto, 2012; McCarthy, Oliver, & Song, 2017). Following Lins
et al. (2016), we also use a CSR dummy variable (Dummy (CSR)) that is
equal to 1 if the firm has a CSR score greater than 0 and is 0 other-
wise, as an alternative CSR measure.
3.2.2 | MA measure
We adopt the measure of MA developed by Demerjian et al. (2012).
This measure captures how efficiently a manager converts corporate
resources into revenues compared with their industry peers. A higher
(lower) value of this indicator implies that this manager is more (less)
able to produce higher (lower) corporate revenues from a given set of
resources. Unlike other proxies of MA, this measure contains less
noise and has been substantiated by a large number of valid tests in
previous studies (Demerjian et al., 2012; Lee et al., 2018).
Following Demerjian et al. (2012), we use a two-step approach to
quantify MA. In the first step, we use data envelopment analysis
(DEA) to capture a firm's efficiency within its industry in a multiple
input–output setting. As Equation (1) shows, the output variable is
the firm's sales (Sales), whereas the input variables are the cost of
goods sold (CoGs); selling and administrative expenses (SG&A); prop-
erty, plant, and equipment (PPE); net operating leases (OpsLease);
net R&D; purchased goodwill (Goodwill); and other intangible
assets (OtherIntan). We use the following optimization procedure
(Equation 1) to estimate the firm's efficiency score, ranging from 0 to
1. Firms operating on the efficient frontier obtain a score of 1, and the
least efficient firms get 0.


Max Ө ¼ ðSalesi,t Þ  ω1 CoGsi,t þ ω2 SG&Ai,t þ ω3 PPEi,t þ ω4 OpsLeasei,t
þω5 R&Di,t þ ω6 Goodwilli,t þ ω7 OtherIntani,t Þ −1 ð1Þ
However, the construction of a firm's efficiency score using the
DEA approach can be affected by both the MA factor and firm-
specific characteristics. Hence, in the second step, Demerjian
et al. (2012) regress the firm-level efficiency score on firm-specific
characteristics to capture the effect of MA:
Firm Efficiencyi , t = β0 + β1 ðTotal assetsÞi , t + β2 Market Sharei , t
+ β3 Free Cash Flow Indicator i , t + β4 lnðAgeÞi, t
ð2Þ
+ β5 Business Segment Concentrationi , t
+ β6 Foreign Currency Indicatori, t + β7 Year i + εi, t
These firm-specific characteristics are firm size, firm market share,
free cash flow indicator, firm age, number of segments, and the for-
eign currency indicator. Thus, our first measure of MA (MABILITY) is
the residual of Equation (2). In addition, our alternative measure is the
decile rank of MA (MABILITY_RANK), which can reduce random
GONG ET AL. 5

measurement errors using a two-step estimation approach (Andreou TABLE 1 Variable definition
et al., 2017; Yuan et al., 2019). Variable Measurement
Dependent variable
Profit margin The ratio of earnings before extraordinary
3.2.3 | Other variables items to book value of total sales
ROA The ratio of earnings before extraordinary
We use both the return on assets (ROA) and return on sales (Profit items to book value of total assets
Margin) to measure firm value. We also use several control variables Independent variable
to capture other firm-level and CEO-level factors that may influence
CSR The total number of strengths minus the total
firm value. For the firm-level characteristics, we consider firm size number of concerns in the KLD database
(SIZE; McWilliams & Siegel, 2000), leverage (LEV; Jiao, 2010), market Dummy (CSR) A dummy variable that equals to 1 if a firm's
to book ratio (MB; Gong et al., 2018), R&D expenditure (RD; Tang CSR score is greater than 0, and 0 otherwise
et al., 2018; Samsul, Muhammadm, Chu, & Ugur, 2019), cash flow MABILITY The managerial ability score, which is
from operations (CFO; Gong & Ho, 2018), capital expenditure (CAP; developed by Demerjian et al. (2012)
Retrenko, Aime, Ridge, & Hill, 2016), the ratio of current assets to cur- MABILITY_RANK The decile rank (by year and industry) of the
rent liabilities (SLACK; Pan, Wang, & Weisbach, 2015), and advertising managerial ability score

expense (ADV; McCarthy et al., 2017). For CEO characteristics, we Control variable:
consider the gender dummy (GENDER; Zhang, Zhu, & Ding, 2013), Firm-level characteristic
CEO age (AGE; Godos-Diez, Fernandez-Gago, & Martinez-Campillo,- SIZE The natural log of the book value of total assets
2011), CEO tenure (TENURE; Chin, Hambrick, & Trevino, 2013), and LEV The ratio of debt to book value of equity
retire dummy (RETIRE; Manner, 2010). Detailed descriptions for each MB The market value of equity divided by the book
variable are listed in Table 1. value of equity
RD Total R&D expenditure divided by the total
book value of assets
3.3 | Descriptive statistics CFO Cash flow from operations divided by total
assets

Table 2 presents the summary statistics of the main variables used in DIV Cash dividends scaled by total assets

our study. The mean values of the dependent variables ROA and Profit CAP Total capital expenditure divided by the total
book value of assets
Margin are 0.16 and 0.34, respectively. For CSR scores, the sample
firms have a mean value of −1.27, demonstrating that, overall, energy SLACK The ratio of current assets to current liabilities

firms received more CSR concerns than strengths during the sample ADV Total advertising expense divided by the total
book value of assets
period. On average, a CEO's ability among energy firms is 0.04, which
is slightly higher than that for all other industries reported by previous CEO characteristic

studies (Demerjian et al., 2013; Yuan et al., 2019). GENDER A dummy variable that equals to 1 if a CEO is
male, and 0 otherwise
Regarding firm-level characteristics, the mean value of the total
AGE The CEO age
assets of energy firms is $13.49 billion. Measured by the debt-to-
equity ratio, LEV has a mean value of 1.37, indicating that the capital RETIRE A dummy variable that equals to 1 if a CEO's
age is at least sixty-three years, and 0
resources of energy firms are mainly from liabilities. On average, an
otherwise
energy firm's R&D expenditure, cash flow from operations, cash divi-
TENURE The number of years since the CEO was in the
dends, capital expenditure, and advertising expenses account for CEO position
0.36%, 4.68%, 1.03%, 16.34%, and 0.01% of its total assets, respec-
tively. On average, CEOs in the energy industry have a tenure of
14.42 years and an age of 52 years, and 99% of CEOs are male.11
To test the presence of multicollinearity, we use the Pearson cor- 4 | E M P I R I C A L RE S U LT S
relation between all variables used in our study. As Table 3 reveals, all
correlations are less than 0.6. We also report the variance inflation This section presents our empirical results. We first investigate the inter-
factors, and all values are less than 10. This suggests that relationship between MA, CSR, and firm value. Following that, we divide
multicollinearity is not a concern in our design. It is worth noting that CSR into MA-associated components and non-MA-associated compo-
both CSR and MABILITY are positively related to firm value, and CSR is nents to investigate the relationship between each of them and firm
positively related to MABILITY at the conventional statistical signifi- value. Finally, we use the crisis period as a natural experimental setting
cance level. to alleviate endogeneity concerns.
6 GONG ET AL.

TABLE 2 Summary statistics that firms with superior CEOs are associated with higher firm value.

MEAN STD Q1 MEDIAN Q3 The coefficients of other control variables are consistent with previous
studies. Taken together, our results reveal that both social performance
Profit margin 0.34 0.30 0.16 0.32 0.56
and MA are significantly positive in relation to firm value.
ROA 0.16 0.08 0.12 0.16 0.20
To identify the dominant factor for firm value, we then augment
CSR −1.27 2.68 −3 −1 0
the MABILITY variable into Equation (3) as follows (McWilliams &
MABILITY 0.04 0.18 −0.08 0.00 0.14
Siegel, 2000):
GENDER 0.99 0.06 1.00 1.00 1.00
X
AGE 52.34 5.27 49.00 52.00 55.00 Firm valuei,t = γ 0 + γ 1 CSRi,t + γ 2 MABILITY i,t + γ i CONTROLi,t + εi,t ð4Þ
RETIRE 0.01 0.11 0.00 0.00 0.00
TENURE 14.42 9.09 7.00 11.00 23.00 where MABILITY is the MA score constructed following Demerjian
SIZE 8.17 1.68 6.90 8.20 9.29 et al. (2012), and other variables are identical to those in Equation (3).
LEV 1.37 4.41 0.84 1.25 1.76 We consider the year and firm fixed effects in each regression, and all
MB 2.21 1.43 1.37 1.89 2.54 standard errors are clustered at the firm level.

RD 0.36% 0.96% 0.00% 0.00% 0.06% From Model (3), we can observe that the coefficient of MABILITY
continues to be positive and significant, as discussed previously. Notably,
CFO 0.05 0.05 0.01 0.03 0.07
the coefficient of CSR is positive but no longer significant, indicating that
DIV 0.01 0.02 0.00 0.00 0.01
the influence of social performance on firm value, which we have already
CAP 0.16 0.11 0.09 0.14 0.21
discussed, does not exist when we consider the factor of MA. Our main
SLACK 1.46 0.78 0.94 1.26 1.73
results are robust when we employ ROA as an alternative for firm value,
ADV 0.01% 0.09% 0.00% 0.00% 0.00%
Dummy (CSR) for social performance, and MABILITY_RANK for MA. In
Note: This table presents summary statistics of main variables in our sum, these results confirm our argument that MA is one of the missing
analysis. links in the CSR–firm performance relationship.

4.1 | MA, CSR, and firm value 4.2 | MA component of CSR on firm value

To assess the impact of our results on the relevant literature, we first
examine how social performance is associated with the firm value in
the energy industry via the following model:
X
Firm valuei,t = ;0 + ;1 CSRi,t + ;i CONTROLi,t + εi,t
where CSRi,t is firm i's overall social performance in year t, and the
control variables (CONTROL) are already specified in the previous sec-
tion. The first proxy for Firm value is Profit Margin, and our second
proxy is ROA. We consider the year and firm fixed effects in each
regression, and all standard errors are clustered at the firm level.
Model (1) in Panel A of Table 4 indicates the coefficient of CSR is
0.012, which is positively correlated with Profit Margin and significant at
the 5% confidence level. Furthermore, as an alternative measure of CSR
performance, we use Dummy (CSR), where a dummy variable is equal to
1 if the CSR score is higher than 0 and is 0 otherwise. Our main results
are robust when we employ Dummy (CSR) in Panel B as an alternative
measure of CSR or ROA as an alternative measure of firm value. These
results confirm our first hypothesis that firms in the energy industry can
foster their firm value by enhancing their social performance.
Next, we replace CSR with MABILITY (MABILITY_RANK) in Model
(2) to examine whether and how MA is correlated with firm value in
the energy industry. We find that there is a significant and positive
relationship between MA and firm value. Specifically, the coefficient of
MABILITY and MABILITY_RANK is 0.430 and 0.367, respectively, and
significant at the 5% (1%) confidence level, respectively. This suggests
To further investigate the crucial role of MA in the CSR-firm value
relationship, we employ a two-stage approach to divide CSR into MA-
associated components and non–MA-associated components. Our
emphasis is that superior CEOs can improve CSR performance, which
ð3Þ in turn enhances firm value.
Yuan et al. (2019) posit that superior CEOs are more likely to
engage in long-term CSR activities due to having alleviated career
concerns, thus leading to better CSR performance. Accordingly, in the
first regression, we estimate how MA affects CSR, as given in Equa-
tion (5). Following Callen et al. (2013) and Gong et al. (2019), the
MABILITY component of CSR (CSRMABILITY) is estimated for each firm-
year as the fitted value of CSR from Equation (5), and the residual dif-
ference between CSR and CSRMABILITY is the non–MA-associated com-
ponent of CSR. In the second stage, we estimate firm-year regressions
of firm value on CSRMABILITY and CSRNonMABILITY, as given in
Equation (6). All regressions include year and firm fixed effects, and
standard errors are clustered at the firm level.
X
CSRi,t = ϑ0 + ϑ1 MABILITY i,t + ϑi CONTROLi,t + εi,t ð5Þ
Firm valuei , t = μ0 + μ1 CSRMABILITY i, t + μ2 CSRNonMABILITY i, t
X ð6Þ
+ μi CONTROLi, t + εi, t
Model (1) in Panel A of Table 5 displays the first-stage result; we
find that the coefficient of MABILITY is 2.485 with t = 2.43, indicating
 GONG ET AL.

TABLE 3 Correlation matrix

VIF (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)
(1) Profit margin 1.00
(2) ROA 0.56 1.00
(3) CSR 1.13 0.17 0.08 1.00
(4) MABILITY 1.30 0.18 0.36 0.15 1.00
(5) GENDER 1.09 0.06 0.07 −0.01 0.04 1.00
(6) AGE 1.31 −0.07 0.09 0.09 0.14 −0.01 1.00
(7) RETIRE 1.18 −0.02 0.10 0.01 −0.02 0.01 0.29 1.00
(8) TENURE 1.25 0.00 0.17 −0.03 0.02 0.07 0.27 0.14 1.00
(9) SIZE 2.35 −0.12 0.06 0.18 0.44 0.00 0.11 0.01 −0.16 1.00
(10) LEV 1.10 −0.03 −0.04 0.01 −0.03 −0.08 0.01 −0.01 0.01 −0.01 1.00
(11) MB 1.16 0.09 0.28 −0.02 −0.05 0.01 −0.05 −0.02 0.15 −0.12 0.09 1.00
(12) RD 1.17 −0.16 −0.03 0.01 −0.10 0.01 0.03 0.05 −0.01 −0.10 −0.01 −0.01 1.00
(13) CFO 1.86 −0.18 0.03 −0.01 0.00 −0.11 0.07 0.01 −0.05 0.10 0.03 −0.03 0.10 1.00
(14) DIV 1.81 −0.08 0.06 0.10 0.12 0.01 0.25 0.02 −0.02 0.21 0.06 0.09 0.07 0.02 1.00
(15) CAP 1.78 0.40 0.11 0.17 0.11 0.06 −0.13 −0.04 0.05 −0.19 −0.01 0.10 −0.21 −0.21 −0.17 1.00
(16) SLACK 2.10 −0.18 0.10 −0.05 −0.15 0.02 0.09 0.18 −0.04 −0.07 −0.02 −0.06 0.21 0.59 −0.04 −0.26 1.00
(17) ADV 1.07 −0.08 −0.04 −0.09 0.04 0.01 0.06 −0.01 0.10 0.00 0.04 −0.01 −0.01 −0.05 −0.02 −0.09 −0.03 1.00

Note: The table presents the Pearson's correlation matrix of all the variables used in the sample. Bold font denotes statistical significance at the 10% level or better.
7
 8

TABLE 4 Effects of CSR and MA on firm value

Panel A:
Dependent variable Profit margin ROA
Predicted sign Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Intercept 0.289 0.400 0.390 −0.124* −0.077 −0.079
(0.81) (0.99) (0.98) (−1.90) (−1.11) (−1.16)
CSR ? 0.012** 0.008 0.003** 0.001
(2.04) (1.35) (2.22) (0.99)
MABILITY + 0.430** 0.413** 0.191*** 0.188***
(2.13) (1.99) (3.76) (3.60)
Control variables YES YES YES YES YES YES
Year-fixed effects YES YES YES YES YES YES
Firm fixed effects YES YES YES YES YES YES
Adj. R2 0.22 0.25 0.26 0.24 0.35 0.35
Observations 939 939 939 939 939 939
Panel B:
Dependent variable Profit margin ROA
Predicted sign Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Intercept 0.330 0.112 0.109 −0.122* −0.189*** −0.190***
(0.95) (0.31) (0.30) (−1.88) (−3.15) (−3.26)
Dummy (CSR) ? 0.116*** 0.008 0.019** 0.002
(4.04) (1.32) (1.99) (1.15)
MABILITY_RANK + 0.367*** 0.359*** 0.132*** 0.130***
(3.66) (3.47) (4.09) (3.96)
Control variables YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES
Firm fixed effects YES YES YES YES YES YES
2
Adj. R 0.23 0.30 0.30 0.24 0.37 0.38
Observations 939 939 939 939 939 939

Note: The table reports the estimated results of the OLS regressions of firm value on CSR and MA. Panel A (B) presents the results when CSR (Dummy_CSR) as a proxy for CSR and MABILITY (MABILITY_RANK) as
a proxy for MA. We report t-statistics in parentheses. ***, **, * denote statistical significance at the 1%, 5%, and 10% levels, based on the year and firm fixed effects and standard errors clustered at the firm
level, respectively.
GONG ET AL.
GONG ET AL. 9

TABLE 5 Effect of CSR on firm value: the role of MA

Panel A:
Dependent variable First stage: CSR Second stage: Profit Margin Second stage: ROA
Predicted sign Model 1 Model 2 Model 3
Intercept −1.163*** 0.315 −0.114*
(−2.58) (0.87) (−1.87)
MABILITY + 2.485***
(2.43)
CSRMABILITY + 0.055*** 0.022***
(2.80) (3.43)
CSRNonMABILITY ? 0.008 0.001
(1.31) (0.93)
Control variables YES YES YES
Year fixed effects YES YES YES
Firm fixed effects YES YES YES
Adj. R2 0.15 0.24 0.28
Observations 1,099 939 939
Panel B:
First stage: CSR Second stage: Profit Margin Second stage: ROA
Dependent variable Predicted sign Model 1 Model 2 Model 3
Intercept −2.121*** 0.281 −0.126*
(−2.86) (0.79) (−1.93)
MABILITY_RANK + 1.395*
(1.91)
CSRMABILITY_RANK + 0.015*** 0.004***
(2.82) (2.76)
CSRNonMABILITY_RANK ? 0.011** 0.003**
(1.97) (2.12)
Control variables YES YES YES
Year fixed effects YES YES YES
Firm fixed effects YES YES YES
Adj. R2 0.16 0.25 0.27
Observations 1,099 939 939

Note: The table reports the estimated results of the two-stage least-squares regression. CSRMABILITY is the MA component of CSR, defined as the fitted
portion of CSR associated with managerial ability. The non-MA component of CSR, CSRNonMABILITY, is defined as the difference between CSR and
CSRMABILITY. An alternative proxy of the MA component of CSR, CSRMABILITY_RANK, is the fitted portion of CSR associated with the rank of the
managerial ability. CSRNonMABILITY_RANK is defined as the difference between CSR and CSRMABILITY_RANK. We report t-statistics in parentheses. ***,
**, * denote statistical significance at the 1%, 5%, and 10% levels, based on the year and firm fixed effects and standard errors clustered at the firm level,
respectively.

that firms with superior CEOs receive higher CSR scores. This is con-
sistent with the findings of Yuan et al. (2019). When CSR is divided
into its MA and residual components, only CSRMABILITY loads signifi-
cantly positively, suggesting that the positive relationship between CSR
and firm value mainly depends on the factor of MA. To be specific,
high-CSR firms can benefit from higher profit margins if they have
superior CEOs. However, the insignificant coefficient
CSRNonMABILITY indicates that other determinants of CSR have little
influence on firm value. In comparing these two coefficients, we find
that 87% of the predictive ability of CSR for firm value is attributable
to the MA component. Our results are robust when we adopt ROA
as a proxy for firm value. Overall, these results confirm our second
hypothesis.
4.3 | MA component of CSR on firm value during
of the financial crisis
In this subsection, we investigate whether the already significant
impact of the MA-associated components of CSR on firm value is
10 GONG ET AL.

TABLE 6 Effect of MA on firm value: the role of MA during the financial crisis

Profit margin ROA mProfit margin mROA

Dependent variable Model 1 Model 2 Model 1 Model 2
Intercept −0.018 −0.184*** −0.0001826** −0.0000472
(−0.05) (−2.65) (−2.10) (−1.07)
CSRMABILITY * financial crisis 0.212* 0.072**
(1.89) (2.26)
CSRNonMABILITY * financial crisis −0.016 −0.007
(−0.76) (−1.29)
Financial crisis −0.049 −0.007
(−0.42) (−0.32)
CSRMABILITY, 2006 * Crisis 0.0000168* 0.0000105*
(1.78) (1.73)
CSRMABILITY, 2006 * Post-Crisis −0.0000004 −0.0000014
(−0.14) (−0.88)
CSRMABILITY, 2006 * (Crisis - Post-Crisis) 0.0000172 0.0000119
p-value (0.01) (0.01)
Control variables YES YES YES YES
Year fixed effect YES YES YES YES
S.D. clustered by firm YES YES YES YES
Adj. R2 0.23 0.29 0.23 0.02
Observations 939 939 1,873 1,570

Note: The table reports the estimated results during the financial crisis. Financial Crisis is a dummy variable that equals to 1 from 2007 to 2009 and 0
otherwise. Crisis is a dummy variable that equals to 1 over the period from July 2007 to December 2009 and 0 otherwise, whereas PostCrisis is a dummy
variable that equals to 1 in the period 2010–2013 and 0 otherwise. We report t-statistics in parentheses. ***, **, * denote statistical significance at the 1%,
5%, and 10% levels, based on the year fixed effects and standard errors clustered at the firm level, respectively.

stronger during the financial crisis. Moreover, the crisis provides a nat-
ural experimental setting to alleviate endogeneity concerns in corpo-
rate finance research (Andreou et al., 2017; Berk & Rauch, 2016; Lins
et al., 2016). Therefore, our investigation in the context of the finan-
cial crisis can help us distinguish whether changes in firm value are
attributable to changes in the MA-associated components of CSR.
Accordingly, we estimate the following model:
Firm valuei , t = π 0 + π 1 CSRMABILITY i, t × Financial Crisis + π 2 CSRNonMABILITY i, t
X
× Financial Crisis + π 3 Financial Crisis + π i CONTROLi, t + εi, t
ð7Þ
where Financial Crisis is a dummy variable that is equal to 1 during
the 2007–2008 financial crisis period and 0 otherwise, and other vari-
ables are identical to those in Table 1. All regressions include year and
firm fixed effects, and standard errors are clustered at the firm level.
From the results of Table 6, we find that energy firms, in general,
experienced relatively low profitability during the period of financial
crisis compared with the pre-crisis and post-crisis period. A positive
and significant interaction between the MA-associated components
of CSR and the financial crisis indicates that the already significant
and positive impact of the MA-associated components of CSR on firm
profitability becomes stronger during the crisis. That is, socially
responsible firms contemporaneously managed by CEOs with superior
abilities still enjoy a higher profit margin during the financial crisis This
supports our conjecture that socially responsible firms with higher
MA managers are more trustworthy and produce lower information
asymmetry, which is highly valued during periods of low social trust.12
Furthermore, we use a difference-in-difference method con-
structed by Lins et al. (2016) to investigate whether pre-crisis high-
CSR firms managed by superior CEOs can help energy firms foster
their value during the financial crisis. To capture the impact of the
financial crisis more precisely, we employ monthly stock returns to
total assets (mROA) and monthly stock returns to total sales
(mProfit Margin) as a dependent variable in Equation (8). Our sample
period starts from 2006, the fiscal year preceding the crisis period,
and ending in 2013, several years into the energy industry's
recovery.
Firm valuei , t = ϵ0 + ϵ1 CSRMABILITY i, 2006 × Crisis + ϵ2 CSRMABILITY i, 2006
X ð8Þ
× PostCrisis + ϵi CONTROLi, t + εi, t
where CSRMABILITY i, 2006 is the fitted value of CSR from Equa-
tion (5), estimated in the fiscal year of 2006. Crisis is a dummy variable
that is equal to 1 in the period July 2007 to December 2008, whereas
PostCrisis is a dummy variable that is equal to 1 in the period January
 GONG ET AL.

TABLE 7 Effect of MA on firm value: 2SLS

Explanatory variables First stage: MABILITY First stage: MABILITY_RANK Second stage: Profit Margin Second stage: ROA
Dependent variable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Dependent variable −0.0561 0.4918** 0.5807 0.0842 −0.0262 −0.1800*
(−0.37) (1.98) (1.58) (0.17) (−0.24) (−1.75)
ΔMABILITYt-1 0.4492***
(10.17)
ΔMABILITYt-2 0.4488***
(10.16)
Ind(MABILITY) 0.5679***
(4.51)
ΔMABILITY_RANKt-1 0.4789***
(11.23)
ΔMABILITY_RANKt-2 0.4780***
(11.21)
Ind(MABILITY_RANK) 0.4783***
(3.56)
MABILITY_2SLS 0.9445** 0.2985**
(2.03) (2.39)
MABILITY_RANK_2SLS 0.5660*** 0.1743***
(2.66) (2.77)
Control variables YES YES YES YES YES YES
Year fixed effect YES YES YES YES YES YES
Frim fixed effect YES YES YES YES YES YES
Adj. R2 0.50 0.47 0.23 0.23 0.28 0.28
Observations 825 825 825 825 825 825

Note: The table reports the estimated results of the 2SLS regression, where we estimate a fitted value of managerial ability in the first stage, and using either Profit Margin in model (3)–(4) or ROA in model (5)–(6)
as the dependent variable. We report t-statistics in parentheses. ***, **, * denote statistical significance at the 1%, 5%, and 10% levels, based on the year and firm fixed effects and standard errors clustered at
the firm level, respectively.
11
12
2009 to December 2013. Other variables are identical to those in
Table 1. All regressions include year and firm fixed effects, and stan-
dard errors are clustered at the firm level.
The results in Table 6 demonstrate a positive and significant rela-
tionship between the pre-crisis MA-associated components of CSR
and monthly financial performance during the financial crisis. After
the crisis, this positive effect disappears and becomes negative but
insignificant.. The differential impact between the periods during and
after the crisis is significant, suggesting that firms that entered the cri-
sis with better CSR performance and superior CEOs experienced
higher profitability during the crisis than in the period immediately fol-
lowing it. This is consistent with our conjecture that when pre-crisis
high-CSR firms with strong management ability enter a crisis, inves-
tors perceive these firms as more trustworthy.
Overall, the results in this section confirm our third hypothesis
that high-CSR firms benefit more from superior MA during the
financial crisis.
4.4 | Endogeneity of MA and firm value: 2SLS
So far, we have established that socially responsible energy firms with
superior MA CEOs experience greater firm value, even during the
financial crisis. On the one hand, one may argue that those firms per-
forming well are more likely to have superior CEOs. On the other
hand, although we have included many control variables, and measure
MA in different methods, the problems of omitted variables, measure-
ment errors, and simultaneity still exist. To reduce those problems
associated with endogeneity, we use a two-stage least squared (2SLS)
approach to investigate further the effect of MA on firm value (Cui,
Jo, & Na, 2018; Lee et al., 2018).
First stage,
CSRi, t = ϑ0 + ϑ1 ΔMAi, t −1 + ϑ2 ΔMAi, t −2 + ϑ3 Industry_MAi, t
X ð9Þ
+ ϑi, t CONTROLi, t + εi, t
Second stage,
X
^ i,t +
Firm valuei,t = ω0 + ω1 MA ωi,t CONTROLi,t + μi,t
In the first stage, we use the differential of one-period-lagged MA
(ΔMAi, t − 1), the differential of two-period-lagged MA (ΔMAi, t − 2), and
the average industry-level MA (Industry_MAi, t) as instrumental vari-
ables. We argue that the change in MA is associated with the MA in
the current period but is less likely to be related to firm value. More-
over, it could also be argued that if the average MA is higher in an
industry, it is more likely to see the MA in a firm in that industry is rel-
atively high, but the industry-level MA is not expected to be associ-
ated with the firm value of any specific firm. In the second stage, we
use the fitted value of MA (MA^ i,t ) from the first stage to estimate the
second-stage regression.
Our 2SLS regression results are presented in Table 7. We observe
that all IVs are significantly positive with MABILITY (MABILITY_RANK)
GONG ET AL.
in the first stage regression. The estimated coefficient of
MABILITY_2SLS (MABILITY_RANK_2SLS) is 0.9445 with t = 2.03
(0.5660 with t = 2.66) when we employ Profit Margin as proxy for firm
value. Similar results are found by using ROA as firm value.
5 | CONCLUDING REMARKS
This study investigates whether CSR performance influences firm
value in the energy industry, where sustainability issues are of particu-
lar interest. We first document a positive relationship between CSR
and firm performance in this industry. However, this positive relation-
ship disappears when we consider the factor of MA. We then provide
evidence that only the MA-associated components of CSR are signifi-
cantly and positively associated with energy firms' value. Finally, CEOs
with superior MA can still efficiently implement CSR investments to
foster firm value, especially during the financial crisis.
Overall, our findings suggest that MA plays a crucial role in the
relationship between CSR and firm performance in the energy indus-
try. A stronger MA is a certification of the benefits of CSR investment,
especially in an unstable market. Hence, it is necessary to consider
MA as an essential factor when energy firms hire managers.
This study is the first to empirically investigate the combined
effect of MA and CSR performance on the firm value within the
energy industry, to the best of our knowledge. It would be inter-
esting to conduct a similar study in other industry settings, such
as consumer-driven and stakeholder-oriented industries. Some
potential factors can effectively improve CSR and thus increase
firm value, especially during crises. Examination of these channels
and their comparison with CSR may be an avenue for
further work.
OR CID
Yujing Gong https://orcid.org/0000-0001-8706-4004
Kung-Cheng Ho https://orcid.org/0000-0002-3475-2089
ENDNOTES
1
Defined by McWilliams and Siegel (2000), CSR is “the actions applied by
ð10Þ firms go beyond business profits and legal requirements while concen-
trate on further social goals”.
2
The case-study approach is commonly employed for this topic, and a
detailed literature review can be found in Patari et al. (2014).
3
For a relatively recent survey, please refer to Aguinis and Glavas (2012).
4
In our paper, energy sector includes listed firms from the Core (28),
Mines (29), and Oil (30) industry, based on the Fama–French 48 industry
classification (Broadstock, Cao, & Zhang, 2012; Dougal, Parsons, &
Titman, 2015). We emphasize that firms in those industries have sub-
stantial impact on environmental pollution and are subject to specific
economic and political risks that do not exist in other industries because
of the nature of their operations (Kolk & Levy, 2001; Smolarski &
Vega, 2013).
5
Several existing studies focus on either the (U.S.) high-technical sector
(Qian & Li, 2003), the (Mexican) auto sector (Muller & Kolk, 2009), or the
(Australian) manufacturing sector (Terziovski, 2010; Torugsa,
O’Donohue, & Hecker, 2012). Consequently, we join these studies and
GONG ET AL.
choose one of the most important sectors conceptualizations—the
energy industry—to conduct an industry-level analysis.
6
Previous literature has argued some missing links between CSR and firm
performance, such as innovation (Bocquet, Bas, Mothe, &
Poussing, 2017), intangible assets (Surroca, Tribo, & Waddock, 2010),
CSR engagement strategy (Tang, Hull, & Rothenberg, 2012), and reputa-
tion and competitive advantage (Saeidi, Sofian, Saeidi, Saeidi, &
Saaeidi, 2015). To the best of our knowledge, we are the first to argue
that MA is a missing link between CSR and firm performance.
7
More details can be found in Section 3.2.2.
8
We rely on the Fama–French 48 industry classification in the Kenneth
R. French data library http://mba.tuck.dartmouth.edu/pages/faculty/
ken.french/data_library.html
9 finance. Financial Management, 16(1), 5–14.
We end our sample at 2013 due to data availability of CSR.
10
Nevertheless, we are aware of alternative CSR conceptualizations and
measures in the literature, for example, Abbott and Monsen (1979)
Carroll (1979), Wood (1991).
11
Likewise, 3 % of the CEOs are female in the literature (e.g., Yuan
et al., 2019).
12
As discussed by Lins et al. (2016), social trust in corporations and the
market has remained low since the end of the crisis.
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How to cite this article: Gong Y, Yan C, Ho K-C. The effect of
managerial ability on corporate social responsibility and firm
value in the energy industry. Corp Soc Responsib Environ
Manag. 2020;1–14. https://doi.org/10.1002/csr.2070