Received: 18 July 2018 Revised: 23 October 2018 Accepted: 10 November 2018

DOI: 10.1002/bse.2263

RESEARCH ARTICLE

Chief executive officer ability, corporate social responsibility,

and financial performance: The moderating role of the
environment
Isabel‐María García‐Sánchez | Jennifer Martínez‐Ferrero

IME (Multidisciplinary Institute for Enterprise),

Universidad de Salamanca, Salamanca, Spain
Correspondence
Jennifer Martínez‐Ferrero, IME
(Multidisciplinary Institute for Enterprise),
Universidad de Salamanca, Salamanca, Spain.
Email: jenny_marfe@usal.es
Funding information
University of Salamanca; Ministry of Science
and Innovation
Abstract
This paper seeks to explore how chief executive officer (CEO) ability influences the
economic impact of corporate social responsibility strategic decisions. Currently, the
evidence on the impact of corporate social responsibility on the value of the company
is mixed; in this paper, we aim to observe the moderate role played by this particular-
ity of the CEO in the relationship between socially responsible commitment and
financial performance. Our results identify that the most able CEOs make investments
in social and environmental practices that lead to greater financial performance; in
contrast, the less able CEOs can overinvest or underinvest in an opportunistic way
for personal benefit at shareholders' expense. In addition, the role that CEO ability
plays in social and environmental strategies is particularly pertinent in munificent
environments that foment managerial discretion; in these contexts, high managerial
ability leads to investment in socially responsible performance, which benefits share-
holders by alleviating moral hazard.

KEY W ORDS

corporate social responsibility, financial performance, managerial ability, managerial discretion,

munificence

1 | I N T RO D U CT I O N
Over recent years, corporate social responsibility (CSR) has become a
priority for companies globally. Among other reasons, this is due to the
relevance that socially responsible investment funds and indices have
acquired in stock markets and the consequences that their criteria
have for the companies regarding their financing conditions. However,
empirically, the previous results of the studies carried out do not allow
the speaking of a unanimity in the economic effect that CSR strategic
decisions have.
Meanwhile, building upon the upper echelon theory, some previ-
ous studies document that CSR strategies correspond to chief execu-
tive officer (CEO)s' intrinsic decisions and are especially determined by
their ability (Chatjuthamard, Jiraporn, Tong, & Singh, 2016; Yuan, Tian,
Lu, & Yu, 2017). This is because the investment in CSR has a long‐term
economic impact, being strongly conditioned by the professional
opportunities that the CEO has and that derive from his or her ability
(Rajgopal, Shevlin, & Zamora, 2006; Yuan et al., 2017). In this sense,
the ablest CEOs obtain better corporate results, which translate into
increases in their remuneration or the possibility of being signed by
other companies (Ali, Li, & Zhang, 2015).
In addition, idiosyncratic managerial attributes are also considered
relevant determinants of the effect of investment on firm value in
practice. According to Hermalin and Weisbach (2017), practitioners
such as financial analysts or suppliers of finance are continually
assessing the “quality of the managers” regarding whether they have
the best intentions and whether their incompetence affects investors.
Able managers are perceived to have better knowledge and skill sets;
thus, they should provide more accurate evaluations of future pay‐offs
(Gan, 2015) and prevent firms from adopting underinvestment and
overinvestment policies that could have a negative impact on profit-
ability and firm value. Therefore, it is expected that the CEO's ability
will allow managers to select adequate investments, positively valuing
the investments in CSR that improve the company's performance,

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2 GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO
even in the long term. Therefore, does a CEO's ability exacerbate the
positive impact of CSR on firm performance?
In this sense, the main objective of this paper is to observe the
moderate role that the ability of the CEO plays in this relationship;
our premise is that the ablest CEOs make investments in CSR that lead
to greater financial performance, in contrast to the less able CEOs
who can overinvest or underinvest opportunistically for personal gain
and at the expense of shareholders (Cheng, Ioannou, & Serafeim,
2014).
In addition, from the resource dependency theory, the external
context where the firms operate exerts a powerful influence on their
behaviour and decision‐making process (Dess & Beard, 1984). Building
upon this theory and attending to the environmental condition in
which a firm operates, more able CEOs show a greater capacity and
ability to face situations of uncertainty (Jiraporn, Leelalai, & Tong,
2016), maintaining their commitment to CSR. Their skills and abilities
can be of vital importance in environments with strong managerial dis-
cretion, where ambiguity is greater and the restriction to managerial
decisions lower (Hambrick & Finkelstein, 1987). The availability of
resources that can be allocated to CSR practices is greater, even when
they are not associated with higher returns compared with their com-
petitors (Aragón‐Correa & Sharma, 2003). Because able managers may
select better firm projects (Chemmanur, Paeglis, & Simonyan, 2009;
Hu & Liu, 2015), we consider that they use their specific knowledge
and experience to make better evaluations of CSR investment in
munificent environments. Moreover, and from an agency perspective
of the conflicts of interest between managers and owners, able man-
agers have fewer career concerns; thus, they do not need to realize
overinvestment in CSR projects that increase their job security and
compensation or make themselves more valuable but that may have
severe negative consequences in the long term (Fahlenbrach, 2009).
Decisions that could be made by less able CEOs are due to the avail-
able resources that firms have in munificent environments. Therefore,
our last question is as follows: To what extent does the munificent
environment affect the relationship between CSR, the CEO's ability,
and financial performance?
The relevance of our research objectives is not unconnected to
business reality. For example, the technology industry is a fast‐growing
sector, where firms operate in an environment that presents competi-
tive opportunities and favourable conditions for their growth. Charac-
terized by the presence of large multinationals in recent years, the
technological titans that seemed to be untouchable have not been
immune to the crisis of reputation generally associated with their posi-
tions of dominance—violation of the privacy of users or scandals asso-
ciated with battery degradation that pushes people to upgrade their
smartphones faster. Thus, although Apple and Facebook are still reeling
after a series of scandals that have tarnished their brands—falls in the
sales of iPhone by around half a million less than expected, and a crash
of Facebook value on the stock market even though their profit rose by
45%—Google seems to have stayed above the fray. In this vein,
although Google has received several sanctions for its dominant posi-
tion, the Alphabet Inc. Group—a conglomerate that encompasses Goo-
gle and other worldwide firms—maintain their corporate performance
and market value. One explanation for this effect is their adequate
CSR strategy, especially their key differentiator, the workplace, which
their CEO Sundar Pichai has embodied within the company's culture.
It allows Google to be the “best reputation firm” for CSR in the world,
according to the Reputation Institute's 2018 Global CR RepTrak 100
rankings study. In addition, the Google leadership position in CSR
actions contrasts with the evolution of the CSR strategy in the technol-
ogy industry, which overall declined by 3.1 points.
In our paper, using a sample of 956 international firms over the
period 2006–2014, we support the positive impact of CSR strengths
on firm performance, the negative impact of irresponsible practices
(CSR concerns), and the moderating effect of CEOs' ability and mana-
gerial discretion on the CSR strengths–performance relationship. The
positive impact of socially responsible practices is even greater when
CEOs' ability increases and firms operate within managerial discretion
contexts. Our results are robust by proposing different measures for
the main variables in the analyses and by controlling for other determi-
nants of CSR, performance and CEO characteristics.
From the above, our paper contributes to previous literature in
several aspects. This paper aims to contribute to the discussion about
and understanding of the role that CEO characteristics, values, and
attributes play in strategic decisions. According to the upper echelon
theory, their personal attributes influence CSR practices and their per-
formance as strategic decisions and even more so in managerial dis-
cretion contexts given the influence of environment on firms'
behaviour—as the resource dependency theory argues. In this respect,
it is true that Chatjuthamard et al. (2016) and Yuan et al. (2017) have
evidenced that CEO ability affects CSR decisions. However, first, our
study reinforces these researches by examining the impact of CSR
on firm performance looking at CEO ability. Our findings also report
that the ablest CEOs allocate the available resources to CSR more effi-
ciently, enhancing firm value. Second, we interrelate the upper eche-
lon theory—CEO characteristics and CSR decisions—and resource
dependency theory, the impact of environment on CSR. In this vein,
and from the premise of the agency conflict where managerial discre-
tion grows, our study focuses on CEO ability in munificent industries,
an aspect unexplored in prior studies. So, we contribute by improving
the understanding of the relevance of CEOs' ability to promote CSR
investments that lead to better firm performance.
Third, we also examine CSR focusing on CSR strengths and con-
cerns, which enables us to examine possible differences between both
socially responsible and irresponsible activities. Further, we addition-
ally explore our research questions by examining CSR issues
concerning internal and external stakeholders. Adopting the approach
of Cruz, Larraza‐Kintana, Garcés‐Galdeano, and Berrone (2014) and
Rodríguez‐Ariza, Cuadrado‐Ballesteros, Martínez‐Ferrero, and García‐
Sánchez (2017) in the family business context, we contribute to the
business literature by examining the CSR commitment in relation to
external and internal stakeholders.
Finally, this study adds exploratory evidence by using a panel data
set that allows for comparison between countries and years. Thus, we
contribute to the literature by adopting an international approach and
by updating the time period (e.g., Chatjuthamard et al., 2016; Yuan
et al., 2017, both focused on the U.S. firms). Methodologically, we
use dependency models of analysis for panel data, unlike previous
studies, which have adopted descriptive analysis, for example, deduc-
tive content analysis or survey instruments.
GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO
In the next section, we discuss the extant literature and establish a
set of null hypotheses. In Section 3, we describe the sample, variables,
and empirical methodology used to test the hypotheses. Section 4
presents the results of our empirical analysis and discusses them.
The concluding section summarizes the main findings, points out the
limitations to this study, and suggests lines for possible future
research.
2 | LITERATURE REVIEW AND RESEARCH
HYPOTHESES
2.1 | Corporate social responsibility, managerial
ability, and financial performance
Our main objective is to analyse the influence of CSR on financial per-
formance given the divergence of results in the previous literature and
the lack of consensus in the CSR–financial performance relationship
(e.g., Martínez‐Ferrero & Frías‐Aceituno, 2015). There are studies that
evidence a positive relationship—in line with the social impact theory
—others that evidence a negative and some even a null relationship
(Orlitzky, Schmidt, & Rynes, 2003). Part of the literature argues that
the lack of consensus on the relationship is due to theoretical and
empirical limitations (McWilliams & Siegel, 2001), among which is
the lack of consideration of other variables, such as attributes of the
CEO or the environment in which the company operates, which are
both investigated in this study.
CSR entails voluntary managerial actions that integrate social and
environmental demands into businesses in order to guarantee firms'
success and survival. Taking into account that CEOs are the firm's
key decision‐makers, especially in the formulation of corporate strate-
gies, including CSR (Aguinis & Glavas, 2012), we focus on how able
CEOs can shape profitability CSR activities in their firms, specifically
in environments characterized by higher managerial discretion. Thus,
does CEO ability moderate the impact of CSR on firm performance?
This relationship has its rationale in the upper echelon theory
from which CEO differences determine the heterogeneity in the stra-
tegic decisions of each company, its policies, its actions, and, there-
fore, its performance (Hambrick, 2007). Literature on this subject,
although limited, agrees that the heterogeneity in CEOs' attributes
and skills determines the CEOs' ability (Bertrand & Schoar, 2003; Silva,
2010); over time, as this ability increases, the labour market value of
the CEO is greater (Gibbons & Murphy, 1992). These studies argue
that CEO ability is associated with more positive career prospects,
superior market labour outcomes and opportunities for promotion,
and fewer concerns about their job, among others. All of these aspects
that determine a CEO's ability, exert at the same time a powerful influ-
ence on strategic decisions.
In contrast, as CEO capacities decrease, they are negatively eval-
uated by the labour market, and they underinvest or reorient their
strategic decisions to short‐term projects, with less risk and uncer-
tainty and therefore give up investments that generate returns in the
long term. Less able CEOs find in short‐term investments the solution
to gain immediate profits and prevent the labour market from identify-
ing their lack of managerial abilities (Narayanan, 1985).
3
Taking into account that a CSR strategy is associated with great
uncertainty and long‐term gains, investment in it is closely linked to
CEOs' ability and their career concerns (Di Giuli & Kostovetsky,
2014; Yuan et al., 2017). In this regard, Chatjuthamard et al. (2016)
and Yuan et al. (2017) associate CEOs' ability with CSR performance
building upon the upper echelon theory.
Given the CEO is primarily responsible in the CSR decision‐
making process, it is necessary to extend the previous arguments to
the role of his or her managerial ability in CSR investments, which
determine the financial performance of the firm. On the one hand,
CSR investments promoted for increasing shareholders' wealth would
improve corporate performance. We would find a positive relationship
between CSR and firm performance also based on the social impact
theory (Waddock & Graves, 1997). Nonetheless, as we have previ-
ously argued, managers may also invest in CSR to obtain private ben-
efits to build personal reputation or obtain higher personal utility,
possibly leading companies to experience losses as these activities
are not likely to be profitable. In this case, we would observe a nega-
tive (or no) relation between CSR activities and firm performance.
On the basis of the above, throughout this paper, it has been
argued that the ablest CEOs show disciplined behaviour in CSR
decision‐making that is consistent with long‐term company objectives
(Anderson & Lillis, 2011). We expect, therefore, a positive effect of
CEOs' ability on CSR and then on firm performance. But if less able
CEOs do not show disciplined behaviour in this respect, the effect of
CSR on performance can be negative, especially if the hidden goal pur-
sued with it is the attainment of personal benefits rather than the
maximization of shareholder wealth. In this case, we expect a decrease
in firm performance as a result of a promotion of CSR from a discre-
tionary perspective—agency cost (García‐Sánchez & García‐Meca,
2018). In addition, less able CEOs can show less enthusiasm for CSR
projects as they focus on short‐term investments, avoiding risk and
uncertain projects that generate career concerns for themselves.
In order to establish our first hypothesis, we have to establish a
null hypothesis due to the fact that we could not find statistically sig-
nificant evidence of influence, but this does not mean that there is no
influence. This approach logic supposes that we should try to reject
the null hypothesis by providing positive or negative evidence. In this
sense, from the above arguments and being aware of the lack of pre-
vious studies, the following null hypothesis is proposed:
Null Hypothesis 1. The relationship between CSR
performance and financial performance will not be
influenced by CEO ability.
2.2 | The moderating role of munificence, such as
managerial discretion environments
As discussed earlier, the upper echelon theory lays the foundation for
how the CEO's socially responsible commitment is a consequence of
his or her career prospects. However, it is not an isolated relationship
but is determined by other aspects such as managerial discretion,
closely related to the CEO's decision‐making process. In this respect,
Dess and Beard (1984), among others, recognize that according to
the resource dependence theory, the external industry context—the
4 GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO
environment—exerts significant influence on an organization's behav-
iour. The environment is the major source of contingencies faced by
a firm (Tosi & Slocum, 1984), affecting strategies, outcomes, and struc-
tures. According to DiMaggio and Powell (1983), among others, firms
are more influenced by external forces than by managerial decisions.
Building upon the resource dependency theory, we focus on man-
agerial discretion that can be understood as the manager's latitude of
action, which may account for why top executives matter more in
some situations than in others (Hambrick, 2007; Hambrick &
Finkelstein, 1987). In contexts with high managerial discretion, there
is a greater problem in the investment decisions that emanate from
agency conflict because the manager shows a greater preference for
investments that have repercussions for his or her own benefit. There
is a clear conflict of interests between owners (principals) and agents
(managers) where managerial discretion grows. As a result of the sep-
aration between property and control and as manifestation of agency
conflict, managers can even undertake projects of doubtful or negative
return in order to increase their firm's control and size (Jensen, 1986);
a greater business dimension allows them to obtain higher salaries and
reputational benefits.
Following Dess and Beard (1984), Keats and Hitt (1988), and
Walters, Kroll, and Wright (2010), among others, we examine munifi-
cence as an environmental condition that influences the relationship
between CSR, financial performance, and the moderating role of a
CEO's ability. As the resource dependency theory assumes, munifi-
cence as an external factor determines the organization's behaviour.
A munificent environment refers to an increased capacity to ensure
continued and sustained growth (Dess & Beard, 1984; Keats & Hitt,
1988). Munificent contexts are characterized by a new firm's ability
to enter the market (Palmer & Wiseman, 1999), by a nonprogrammed
decision‐making process and by a means–ends ambiguity (Hambrick &
Abrahamson, 1995). All provide higher investment opportunities and
resources, leading to superior “strategic degrees of freedom” for their
CEOs (Hambrick & Finkelstein, 1987) by recognizing opportunities for
private benefits.
In munificent contexts, managers have more resources available,
which can be allocated to innovative projects, to new combinations
of resources, and to reinforce their entrepreneurial side (Rosenbusch,
Rauch, & Bausch, 2013).1 Among the purposes for which these
resources are used, CSR practices acquire special relevance (Aragón‐
Correa & Sharma, 2003), benefiting firms with a competitive advan-
tage associated with these actions even when they do not necessarily
translate into higher profitability, as it also increases firm costs but
1
Several previous studies have supported the above premise. Sharma (2000)
argues that managers perceiving higher munificence respond to CSR issues as
opportunities for growth, as a form of strategic investment. Meanwhile, Goll
and Rasheed (2004) argue that higher munificence firms are more likely to
engage in socially responsible behaviour than are environments with scarce
resources whose economic conditions are deteriorating. Similarly, Martinez‐
del‐Rio, Antolin‐Lopez, and Cespedes‐Lorente (2015) argue that in a higher
munificence context, resources are not limited and the relative cost of investing
in CSR strategies is lower than when munificence is lower. Thus, in highly munif-
icent environments, through CSR strategies, companies guarantee the support
of shareholders, customers, employees, community, and many other stake-
holders, even when managerial objectives are discretionary.
allows managers to meet stakeholders' demands and gain their sup-
port (Delmas & Toffel, 2004).
Thus, CSR can be perceived as a strategy that allows managers to
obtain private benefits, because they are not obliged to show a compet-
itive superiority nor to guarantee the survival of the company—as
already guaranteed in munificent environments (Peteraf & Bergen,
2003). In this sense, in munificence environments, firms can invest in
projects that improve managerial power or prestige instead of in pro-
jects that increase payouts to shareholders and improve firm value
(Fahlenbrach, 2009). Similarly, they can invest in high‐risk projects that
do not enhance shareholder value if the projects increase their job
security, compensation or make themselves more valuable (Gan,
2015). In this vein, it is therefore necessary to know that prior evidence
has drawn attention to the idea that excess free cash flow of munificent
contexts encounters agency conflicts that can lead management to act
opportunistically and derive personal benefits from unprofitable
investments (Aktas, Andreou, Karasamani, & Philip, 2016).
Thus, CEOs' ability reinforces their role in the decision‐making
process in environments characterized by greater discretionary man-
agement—munificent environments. Because able managers are per-
ceived to have better knowledge and skill sets, managerial ability
should improve the identification of the key drivers of future firm
growth as well as the accurate valuation work of future pay‐offs, hav-
ing an impact on CSR investment decisions. In this sense, the ablest
managers may use their specific knowledge and experience that lead
them to make better evaluations of CSR investment in munificent
environments. Chemmanur et al. (2009) showed how CEOs' ability is
positively associated with better firm projects, acquiring higher levels
of capital expenditures as well as investments in research and devel-
opment (R&D); similarly, Hu and Liu (2015) reported that firms with
the most able managers (measured by career experiences) have lower
investment–cash flow sensitivity.
Therefore, we expect that in environments in which they enjoy
more freedom in making decisions, able CEOs implement more ade-
quate CSR strategies than less able ones, realizing less CSR overin-
vestment, which improves their power or prestige rather than
making investment decisions that increase payouts to shareholders
and enhance firm value (Fahlenbrach, 2009). Similarly, they can invest
in low‐risk projects that do not enhance shareholder value although
the projects increase their job security and compensation or make
themselves more valuable (Gan, 2015).
In addition, we expect that the CEO's ability will affect the CSR–
financial performance relationship in munificent environments, given
that they show greater capacity and control of the environment
(Judge, Scott, & Ilies, 2006). Considering that CSR outcomes in terms
of economic benefits for the firm are not relevant in munificent envi-
ronments (Zahra & George, 2002), less able CEOs may ignore the
resources available (less ability to control the environment); as a result,
they reduce the organizational performance to increase CSR's
deconcentrated effort and provide no value to shareholders—under
the premise of agency conflict. Moreover, the CEO's ability will also
affect because of the lower interest towards objectives merely perfor-
mance than the less able CEOs (Chatterjee & Hambrick, 2007). CEOs
that are more able do not need to attract the attention of the market
or the stakeholders. In contrast, less able CEOs can undertake CSR
GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO
actions to achieve stakeholders' satisfaction and get the market to
praise their management, thereby obtaining personal benefits associ-
ated with a higher reputation; but in this case, CSR would not have
positive effects on firm performance.
From the above arguments and despite the direction of the rela-
tionship being unclear, the following null hypothesis is proposed:
Null Hypothesis 2. The relationship between CSR
performance and financial performance moderated by
CEO ability is not reinforced when market munificence
(managerial discretion) is high.
3 | METHODOLOGY
3.1 | Sample and data description
The data for this paper are obtained from the fusion of information
available in two databases for a period of analysis from 2006 to
2014. On the one hand, economic and financial data were collected
from Thomson Reuters Eikon. Initially, we take into consideration
information on all the firms from the global benchmark stock indices
for America, Europe, the Middle East, Africa, and Asia, comprising
3,594 companies from 31 stock indices, once duplicated companies
have been removed, including national and multinational companies
with operations in many countries. In addition, we combined the firms'
CSR information from the Ethical Investment Research Service (EIRIS
hereinafter) database. After excluding observations without financial,
economic, and CSR data, a final unbalanced sample of 6,442 firm‐year
observations spanning 10 years (2006–2014) was available to test the
hypotheses. The firms are engaged in activities in different sectors and
are from 28 different countries.
3.2 | Variables
3.2.1 | Corporate social responsibility performance
To measure CSR, we use the EIRIS database score, which has been
widely used in the literature. EIRIS database is widely used in the
extant literature, including Brammer, Brooks, and Pavelin (2006),
Scholtens and Dam (2007), Louche, Arenas, and van Cranenburgh
(2012), Dam and Scholtens (2012a, 2012b), Fabrizi, Mallin, and
Michelon (2013), Martínez‐Ferrero and Frías‐Aceituno (2015), and
Martínez‐Ferrero, Banerjee, and García‐Sánchez (2016). EIRIS assigns
grades on specific attributes in the different areas. This procedure
involves some subjective assessment of relevant practices of the firms.
However, given the ways in which the topics and questions are
framed, we are convinced that the research by EIRIS results in
2 moving standard deviation identifies the long‐term effect that CSR
EIRIS is a leading global provider of independent research into the environmen-
tal, social, and governance performance of companies. EIRIS is an independent
research organization serving investors that provides nonfinancial information
on company environmental, social, and ethical policy and practice. It provides
comprehensive research on over 3,000 companies globally. It offers consistent,
comparable data on over 110 different environmental, social, and governance
areas, including board practice, bribery, and corruption, managing environmental
and climate change impacts, human rights, and supply chain labour standards.
See more at: http://www.eiris.org/.
5
reasonable measures. The EIRIS process starts with information
disclosed by the companies. Then, targeted questionnaires are sent
to companies regarding areas where public data are unclear. These
result in considerable focused dialogue with companies that help clar-
ify any concerns and refine their opinion. Sector specialists within
each team review the research before the score is released.
We consider the classification in socially responsible and irrespon-
sible investments of the previous literature because, as Mackey,
Mackey, and Barney (2007) argue, the first are activities that could
decrease shareholder interests and divert valuable resources to soci-
ety, whereas irresponsible activities are considered a cost‐saving strat-
egy to achieve financial performance in the short term, which destroys
the value of stakeholders (Tang, Qian, Chen, & Shen, 2015). In this
sense, EIRIS includes strength ratings and concern ratings for five
dimensions—environmental, employees, human rights, stakeholders,
and ethics—across 26 issues. We split the items into CSR strengths
and CSR concerns. According to the scoring criteria of EIRIS (inade-
quate, weak, moderate, good, and exceptional), we assigned five
values: 1, 2, 3, 4, and 5. Overall, we considered strengths for those
items with a score above the threshold of 3; otherwise, they are con-
sidered concerns (Values 1 and 2). Within each of these categories are
items to which we assign a 1 or 0 according to whether or not a firm
meets certain criteria (Mattingly & Berman, 2006). We consider all the
strength items to be consistent with acting socially responsible and all
the concern items to be consistent with acting socially irresponsible
2 (Kotchen & Moon, 2012). Then, we created the “CSRStrength” indica-
tor variable by summing the number of strengths across the five
dimensions to measure the extent of a firm's participation in socially
responsible activities (Kotchen & Moon, 2012; Strike, Gao, & Bansal,
2006) and “CSRConcern” as the total number of concerns (Godfrey
et al., 2009; Strike et al., 2006).
3.2.2 | Financial performance
Corporate financial performance is measured by the 3‐year moving
standard deviation of industry‐adjusted Tobin's Q (“TobinQ”). Most
previous literature and empirical studies use accounting data to mea-
sure financial performance, as opposed to market‐based measures
(Waddock & Graves, 1997).3 In this paper, we opt for a market
approach, and we use Tobin's Q as a proxy for financial performance
because it emphasizes the potential total value of a firm and enables
us to capture whether or not stakeholders value the intangible assets
derived from a firm's social awareness (Hillman & Keim, 2001; Surroca,
Tribó, & Waddock, 2010). “TobinQ” was calculated by the sum of the
market value of equity plus short‐term debt plus long‐term debt
divided by total assets (Chung & Pruitt, 1994). The use of a 3‐year
investment could have on financial performance.
3
Following Hillman and Keim (2001), accounting measures are less successful
than market measures because they are not able to capture the long‐term value
of the company, as they focus on past performance and can be subject to the
possibility of manipulation by the manager.
6 GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO
3.2.3 | Managerial ability
Following Demerjian, Lev, and McVay (2012), we define managerial
ability (CEOAbility) by calculating a data envelopment analysis (DEA)
score, which generates an estimate of how able managers use their
firms' resources, and document a strong relationship between effi-
ciency and managers' ability and its consequences. The DEA score
indicates that high‐ability managers will generate a higher rate of out-
put from the given inputs than lower ability managers, who will obtain
the opposite results. More concretely, they estimate firm efficiency
(DEA score) within industries, comparing the sales generated by each
firm (the output) conditional on the following inputs used by the firm:
cost of goods sold; selling and administrative expenses; net property,
plant, and equipment; net operating leases; net R&D; purchased good-
will; and other intangible assets. Later, they regress the DEA score to
obtain the residuals, that is, the values that identify the efficiency
attributable to the manager. For this purpose, they purge the DEA
score of key firm‐specific characteristics that are expected to aid or
hinder the management's efforts, including the firm size, market share,
positive free cash flow, firm age (which aids the management), and
complex multisegment and international operations (which challenge
the management).
3.2.4 | Munificence
Munificence refers to the abundance of resources in an industry that
support growth, typically measured as the industry growth rate (Chen,
Zeng, Lin, & Ma, 2017). Similar to Goll and Rasheed (2004), Chen et al.
(2017), among others, we use Keats and Hitt's (1988) measure for
operationalizing munificence, originally developed by Dess and Beard
(1984). Following Keats and Hitt (1988), the 5‐year industry growth
rate in net sales in one industry was designated as the indicator for
environmental munificence. To calculate it, we regress the natural
log of industry sales on an indicator of years as an independent vari-
able. The antilog of the regression slope coefficient was used as the
measure for munificence “Munif” as the average growth (or decline)
in an industry.
3.2.5 | Control variables
In addition, to avoid biased results in our proposed models, we include
a number of control variables (firm, board, and CEO‐level aspects)
according to previous studies of CSR and financial performance. The
firm‐level control variables include “Size” as the natural logarithm of
total assets, which represents firm size, “ROA” as the ratio of return
on assets, which represents firm profitability; “Leverage” as the ratio
of total debt to total equity, which represents firm leverage; “R&D”
as the ratio of R&D expenses to sales; cash and “StdCFO” as the stan-
dard deviation of cash flow from t − 1 to t, which represents cash flow
from operations; cash dividends “Div” as the dividend‐paying firms;
and the Herfindahl–Hirschman Index “Herf.” Meanwhile, corporate
board characteristics are also known to affect CSR (Johnson & Green-
ing, 1999). Thus, we include board size (“BoardSize”) as the total num-
ber of directors, and the proportion of independent directors
(“BoardIndep”) as the ratio of independent directors to total directors
of the board. For CEO‐level controls, we include three variables that
measure CEO characteristics. The first variable is a chair dummy
(“CEODuality”), which is equal to 1 if a CEO is also the chair of the
board of directors and 0 otherwise and represents CEO duality. The
second variable is a gender dummy (“CEOFemale”), which is equal to
1 if the CEO is female and 0 otherwise. The last variable is CEO tenure
(“CEOTenure”), which measures the number of years a CEO has occu-
pied the CEO position. Finally, to control for variation across time,
country, and industry, we include year, country, and industry dummies.
3.3 | Model and analysis technique
The econometric model used is based on dependence techniques for
panel data. Specifically, we use the dynamic panel estimator proposed
by Arellano and Bond (1991), on the basis of the generalized method
of moments, namely, the two‐step system estimator of Arellano and
Bond (1991).
This research aims to examine whether the relationship between
CSR and corporate financial performance is moderated by CEO ability
and what this relationship is in munificent environments. To do so, the
“TobinQ” is regressed on CSR strengths and concerns, CEO ability, and
munificence as indicator variables, all of the possible interactions
among them, and the control variables as follows:
TobinQi;t ¼ φ0 þ φ1 CSRStrengthi;t þ φ2 CSRConcerni;t
þ φ3 CEOAbilityi;t þ φ4 Munifi;t
þ φ5 CSRStrength*CEOAbilityi;t
þ φ6 CSRConcern*CEOAbilityi;t
þ φ7 CSRStrength*Munifi;t þ φ8 CSRConcern*Munifi;t
þ φ9 CEOAbility*Munifi;t
þ φ10 CSRStrength*CEOAbility*Munifi;t
þ β11 CSRConcern*CEOAbility*Munifi;t
þ ∑23
j¼12 φj Controlsi;t þ φ24 Industryi;t þ φ25 Countryi
þ φ26 Yeart þ μi;t þ ηi ; (1)
where η controls for the unobservable heterogeneity; μ represents the
disturbance term; i represents each firm; t refers to the time period;
and φ is the parameter to be estimated.
4 | RESULTS
4.1 | Descriptive results
Table 1 reports the descriptive statistics of the variables for the full
sample (Panel A), as well as for the sample split into higher versus
lower CEO ability (Panel B), munificence or managerial discretion
(Panel C), and both previous criteria (Panel D). The variable “TobinQ”
as a firm performance indicator has an average of 0.965—that is, the
market value of a firm is lower than its book value; although, in any
case, the mean value is around 1, meaning that firm shares are not
overvalued or undervalued; its mean value shows clear differences
attending to Panels B–D. Firm performance increases when CEO abil-
ity is higher, in munificent environments and under the combination of
both aspects; in other words, the market value of a firm is higher when
they operate under the above‐mentioned scenarios. “CSRStrength”
shows a mean value around 15 (range: 0–78), a fairly low value despite
GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO 7

TABLE 1 Descriptive statistics

M SD M SD M SD
Panel A. Full sample Panel B. Higher vs. lower able CEOs
TobinQ 0.965 0.463 TobinQ 0.985 0.44 0.945 0.486
CSRStrength 15.352 5.919 CSRStrength 16.109 5.754 14.595 6,084
CSRConcern 16.147 3.617 CSRConcern 15.443 3.471 16.851 3,763
CEOAbility 0.782 0.010 CEOAbility 0.788 0.006 0.776 0.014
Munif 1.062 1.018 Munif 1.059 0.018 1.065 0.018
Size 5.276 1.648 Panel C. Higher vs. lower munificence environments
ROA 0.065 0.732 TobinQ 0.996 0.172 0.934 0.754
Leverage 0.578 0.191 CSRStrength 13.650 5.998 17.054 5,840
R&D 0.028 0.132 CSRConcern 17.758 5.690 14.536 1,544
StdCFO 0.009 0.008 CEOAbility 0.781 0.007 0.783 0.013
Div 20.4 33.648 Munif 1.087 0.008 1.037 0.028
Herf 0.091 0.131 Panel D. Higher vs. lower able CEOs in munificence environments
BoardSize 11.037 3.177 TobinQ 0.976 0.151 0.954 0.775
BoardIndep 0.633 0.286 CSRStrength 15.075 5.997 15.629 5,841
CEODuality 0.357 0.479 CSRConcern 16.409 3.690 15.885 3,544
CEOFemale 0.341 0.474 CEOAbility 0.785 0.008 0.779 0.012
CEOTenure 7.339 3.828 Munif 1.075 0.016 1.049 0.02

Note. N = 6,442 firm‐year observations. CSR: corporate social responsibility; CEO: chief executive officer; ROA: return on assets; R&D: research and
development.

the growth experienced by the CSR commitment in recent years; sim-
ilar to the previous variable, socially responsible activities on average
are higher when CEO ability is higher, when munificence is lower,
and both criteria are lower. Meanwhile, “CSRConcern” has a mean
value of 16.147 (range: 0–52) and is higher when CEO ability is lower,
when munificence is higher, and both criteria are higher. “CEOAbility”
with a mean value of 0.782 is higher when munificence in a managerial
discretion context is lower. Finally, “Munif,” measured as the 5‐year
industry growth rate in net sales in one industry, shows a mean value
of 1.062, meaning an average growth in industry. It shows higher
values when CEO ability is lower. The descriptive results for the other
variables appear to be reasonable and comparable with those obtained
in previous studies.
4.2 | Validation analysis for environmental
munificence and managerial discretion
Throughout the paper, one of our premises is that munificent context
provides higher investment opportunities and resources for managers
that could be allocated by adopting discretionary strategies that rec-
ognize opportunities to obtain private benefits. In other words, munif-
icent environments are those contexts associated with a superior
managerial discretion in the decision‐making process, discretion that
could affect the relationship between CSR and financial performance.
With the aim to determine the relationship between environmen-
tal munificence and managerial discretion and ensure the validity of
our premise, we have provided two graphics that identify the relation-
ship between our variable “Munif” and two proxies of managerial dis-
cretion—earning management and overinvestment. First, earnings
management (EM) is a discretionary accounting practice consequence
of managers engaged in EM practices and report accounting results
that do not correspond to those actually achieved (Kim, Park, & Wier,
2012). In order to identify the managerial accounting discretion, we
used the Dechow, Sloan, and Sweeney (1995) model where EM is
proxy through the discretionary component of accruals. Second, over-
investment strategies are measured using the model proposed by Bid-
dle, Hilary, and Verdi (2009), whose positive residuals identify
different deviation form optimal investment. Following these authors,
we rank this measure into quartiles and rescale the quartile rankings
from 0 to 4. Firm‐year observations in the bottom quartile (e.g., the
most negative residuals) are classified as underinvestment, whereas
observations in the top quartile (i.e., the most positive residuals) are
classified as overinvestment, and observations in the middle two quar-
tiles are classified as the benchmark group. Once the firms have been
classified, “Overinvestment” is coded as 1 for firm‐year observations
in the top quartile and 0 otherwise.
Figures 1 and 2 show the representation of the relationship
between munificence and EM and between munificence and overin-
vestment strategies, respectively. These figures clearly confirm our
premise by showing how munificence is positively related to
FIGURE 1 Munificence and earnings management (EM)
8 GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO

TABLE 2 CSR, financial performance, and managerial ability in

munificence environments

TobinQ
Variables Coefficient SD
Main effects
CSRStrength 1.965* 1.122
CSRConcern −2.040* 1.160
CEOAbility 0.001** 0.000
CSRStrength * CEOAbility 0.009* 0.005
CSRConcern * CEOAbility −0.007 0.010

FIGURE 2 Munificence and overinvestment strategies Munif 0.022*** 0.008

CEOAbility * Munif 27.836 43.760
CSRStrength * Munif 0.000 0.000
managerial discretion represented by EM practices and to overinvest-
CSRConcern * Munif 0.000 0.001
ment strategies—the greater the munificence, the greater the EM and
CSRStrength * CEOAbility * Munif 1.920* 1.090
overinvestment strategies. The corroboration of our premise allows
CSRConcern * CEOAbility * Munif 0.000 0.000
us, in the following section, to examine our research hypotheses.
Control variables
Size 0.010 0.010
ROA −0.002*** 0.000
4.3 | Multivariate results Leverage −0.331*** 0.036
R&D −0.029*** 0.004
Table 2 presents the results for the relationship between CSR, CEO
StdCFO 29.122 46.596
ability, munificence, and financial performance. First, CSR strength
Div 0.000** 0.000
(concerns) has a significant and positive (negative) impact on firm mar-
Herf 0.012 0.009
ket value (coef. 1.965, p < 0.10; coef. −2.040, p < 0.10). Thus, CSR
BoardSize 0.002 0.002
investments positively affect firm performance. The significant and
BoardIndep −2.092* 1.193
positive effect of “CEOAbility” and “Munif” indicator variables provide
CEODuality 0.018 0.011
some insights for testing Null Hypotheses 1 and 2 (coef. 0.001,
CEOFemale 0.064 0.344
p < 0.05; coef. 0.022, p < 0.01, respectively). Firm performance
CEOTenure 0.001 0.001
increases when CEOs' ability is higher and firms operate under mana-
Industry, country, and year Controlled
gerial discretion contexts, that is, when the availability of resources
Z 193.14
and firm growth are higher.
m1 −6.190
On the one hand, the positive effect of socially responsible prac-
m2 −2.230
tices “CSRStrength” is even greater when CEOs' ability increases; the
Hansen 76.53
interaction “CSRStrength * CEOAbility” shows a significant and posi-
Note. N = 6,442 firm‐year observations. Estimated coefficients and associ-
tive impact on market value (coef. 0.009, p < 0.10). This interaction
ated standard errors are reported. CSR: corporate social responsibility;
shows that the monetary impact that CSR‐related investments have CEO: chief executive officer; ROA: return on assets; R&D: research and
on firm value is higher when the strategic decisions are taken by able development.
CEOs. The nonsignificant effect of “CSRConcern * CEOAbility” vari- *p < 0.10. **p < 0.05. ***p < 0.01.
able indicates that the investors and other market participants do
not react differently to irresponsible actions of firms, independently when the CSR strategy is promoted by the most able CEOs who pro-
of the managerial ability of their CEOs. mote them under managerial discretion contexts. The results indicate
The above evidence allows us to partially reject Hypothesis 1; that the monetary impact that socially responsible investments have
that is, the positive relationship between CSR strengths and financial on firm value is higher when the strategic decisions are taken by able
performance is exacerbated by CEOs' ability, whereas the negative CEOs and even more so in managerial discretion contexts. Again, we
relationship between CSR concerns and financial performance is not partially reject our Hypothesis 2 because only those CSR strategies
affected by it. One of the plausible reasons for the nonsignificant oriented to reinforce social and environmental strengths that able
effect on performance of CSR concerns, independently of CEO ability CEOs realize in environments with higher managerial discretion create
and the level of munificence, is the lower commitment of managers in shareholder value.
the development of proactive CSR investments (Orlitzky et al., 2003).
On the other hand, the interaction
“CSRStrength * CEOAbility * Munif” provides interesting findings for 4.4 | Sensitivity analysis
our paper. This interaction exerts a significant and positive influence
on firm performance (coef. 1.920, p < 0.10). It shows that the greater To test the robustness of our results, we develop several sensitivity
market value because of socially responsible practices is superior analyses by proposing alternative measures of CSR performance, firm
GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO 9

financial performance, and managerial ability. Our main managerial
ability measure, the “CEOAbility,” is the managerial efficiency metric
developed by Demerjian et al. (2012). In order to obtain robust results,
we use a new measure of managerial ability. More specifically, we use
a stochastic frontier analysis, a parametric model that allows us to iso-
late random shocks in the production process from changes in techni-
cal efficiency (Baik, Chae, Choi, & Farber, 2013), “SFA_CEOAbility.”
Robust analysis for CEOs' ability measure is reported in Table 3.
As a second sensitivity analysis for CSR, on the basis of Deng, Kang,
and Low (2013), we re‐estimate our two regression models by proposing
an alternative measure. Specifically, they break down CSR performance
into strengths and concerns for every year because they could change
every year. Considering this, we examine the degree of the strengths
and concerns subcomponents, taking into account their values, creating
two scores based on the sum of Value 1 or 2 for concerns and Value 3,
4, or 5 for strengths. In order to assign a correct score for CSR concerns,
we reassign a value of 2 to inadequate behaviour and 1 to a weak prac-
tice, the opposite values that they received in the initial scale.
In relation to the alternative measure of firm performance, and as
we indicated in Section 3, researchers traditionally use financial mea-
sures versus market‐based indicators in order to analyse the relation-
ship between CSR and performance. In order to obtain robust results,
we measure financial performance by using an accounting ratio, “ROA”
(return on assets) that can provide information from the income state-
ment and balance sheets about the firm's financial health. The higher
score of this indicator means that management is better in generating
profits with total assets of the firm. More specifically, we use the 3‐
year moving standard deviation of industry‐adjusted ratio. Robust
analyses for alternative proxies for CSR and firm performance are
reported in Table 4.
The results obtained for the different sensitivity analyses indicate
that our results are robust due to new managerial ability proxies
(Table 3) and new measures for CSR and firm performance (Table 4);
sensitive analyses report the same effects as those obtained in the pre-
vious section. Therefore, we support our previous evidence about the
positive (negative) impact of CSR strengths (concerns) on firm perfor-
mance. In this respect, as previously discussed, the positive impact of
CSR strengths on firm performance is even greater when CEOs' ability
increases and firms operate under managerial discretion contexts.
Overall, our results provide the following insights. We support the
positive impact of CSR strengths on firm performance, the negative
impact of irresponsible practices (CSR concerns), and the moderating
effect of CEOs' ability and managerial discretion on the CSR
strengths–performance relationship. The positive impact of socially
responsible practices is even greater when CEOs' ability increases
and firms operate in managerial discretion contexts.
First, we find a positive impact of CSR performance on financial
performance, supporting the previous general literature about the pos-
itive relationship between CSR and firm performance (Orlitzky et al.,
2003) and the social impact theory's premise (Waddock & Graves,
1997). Similar to Anderson and Lillis (2011), we find that CEOs' ability
is positively associated with disciplined behaviour in CSR decision‐
making, which is coherent with the long‐term objective of the com-
pany and thus increases financial performance. This evidence, then,
is in accordance with the argument defended in upper echelons theory
that posits how CEO differences determine the heterogeneity in the
strategic decisions of each company, such as CSR performance
(Hambrick, 2007).
Moreover, we document that only the CSR strategies that able
CEOs realize in environments with higher managerial discretion create

TABLE 3 Robust result for managerial ability (I)

TobinQ
Variables Coefficient SD

Main effects
CSRStrength 0.075** 0.030
CSRConcern −0.079** 0.032
SFA_CEOAbility 1.769** 0.719
CSRStrength * SFA_CEOAbility 1.789** 0.753
CSRConcern * SFA_CEOAbility 0.000 0.000
Munif 0.015* 0.008
MA * Munif 0.008 0.010
CSRStrength * Munif 2.299 1.490
CSRConcern * Munif 0.000 0.001
CSRStrength * SFA_CEOAbility * Munif 1.684** 0.711
CSRConcern * SFA_CEOAbility * Munif −1.565 1.391
Control variables, industry, country, and year Controlled
Z 201.84
m1 −6.290
m2 −2.960
Hansen 73.39

Note. N = 6,442 firm‐year observations. Estimated coefficients and associated standard errors are reported. CSR: corporate social responsibility; CEO: chief
executive officer.
*p < 0.10. **p < 0.05. ***p < 0.01.
10 GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO

TABLE 4 Robust result for CSR and financial performance (II)

ROA
Variables Coefficient SD
Main effects
CSRStrengthScore 0.154*** 0.047
CSRConcernScore −0.519*** 0.047
CEOAbility 19,815.900*** 4,544.381
CSRStrengthScore * CEOAbility 20,976.410*** 4,849.989
CSRConcernScore * CEOAbility −107.836 94.164
Munif 1.063* 0.635
MA * Munif 119.196 90.976
CSRStrengthScore * Munif 0.317 0.545
CSRConcernScore * Munif −108.240 85.382
CSRStrengthScore * CEOAbility * Munif 4.769*** 0.858
CSRConcernScore * CEOAbility * Munif −98.638 88.419
Control variables, industry, country, and year Controlled
Z 445.55
m1 −7.140
m2 −3.160
Hansen 186.79

Note. N = 6,442 firm‐year observations. Estimated coefficients and associated standard errors are reported. ROA: return on assets; CSR: corporate social
responsibility; CEO: chief executive officer.
*p < 0.10. **p < 0.05. ***p < 0.01.

shareholder value, that is, only the CSR strengths. In contrast to
Mackey et al. (2007), we do not find that socially responsible practices
decrease shareholder interests. Moreover, in line with Zahra and
George (2002) and given the previous literature, we document as
our main result the following. Given the agency conflicts of interest,
the ablest CEOs cannot ignore the greater availability of resources in
munificent contexts—even despite the risk of pursuing their personal
objectives—thus, they increase the CSR investments that lead to supe-
rior financial performance. In other words, the positive relationship
between CSR and firm performance is greater when CEOs' ability
increases and, even more, when munificence is high. In this respect,
we also provide evidence according to the resource dependency the-
ory by supporting how the environment in which the firm operates
impacts on the firm's behaviour and decision‐making process (Dess
& Beard, 1984).
Second, according to Hambrick (2007), our evidence supports that
differences in CEO attributes lead to a heterogeneity in strategic deci-
sions where their career prospects, among other aspects associated
with the CEO's ability (Bertrand & Schoar, 2003; Silva, 2010), play a
fundamental role on determining CSR performance. In this respect,
and similar to Narayanan (1985), Chatjuthamard et al. (2016), and
Yuan et al. (2017), CEO ability is positively associated with CSR invest-
ments; more able CEOs find in CSR practices, despite their long‐term
horizon, a means of increasing their career opportunities and their
labour market assessment.
Third, we support the impact of the environmental context on
strategic decisions in line with Dess and Beard (1984), Keats and Hitt
(1988), and Palmer and Wiseman (1999), among others. In particular,
we provide initial support that greater managerial discretion in munif-
icent environments is a result of the greater availability of resources,
ambiguity, uncertainty, and opportunities for extracting private bene-
fits by CEOs (Hambrick & Finkelstein, 1987; Jensen, 1986;
Rosenbusch et al., 2013). In this respect, we support the previous evi-
dence reported by Chemmanur et al. (2009), Fahlenbrach (2009), and
Gan (2015); that is, a more able CEO shows a greater incentive to real-
ize only those CSR strategies that are positively associated with firm
value, thus reinforcing the positive CSR outcomes on financial perfor-
mance. The more able CEOs avoid any action that could damage
shareholders' wealth.
4.5 | Complementary results: Internal and external
stakeholders
In addition, CSR is a multidimensional concept that encompasses a
variety of areas—ethics, stakeholders, the environment, human rights,
and employees—that could be aggregated into two groups of stake-
holders: internal (employees and governance) and external (the envi-
ronment, the community, customers, and suppliers). For the first
stakeholders' group, CSR practices, policies, and actions are related
to the physiological well‐being of the firm's employees (Brammer &
Millington, 2008), for instance, employee health and safety, employee
training, equal opportunity, and other actions that develop a feeling of
cohesion. This feeling by internal stakeholders leads to superior pro-
ductivity, innovation, performance, and other firm benefits. Mean-
while, with respect to external stakeholders, CSR practices, policies,
and actions are related to social and environmental actions, for exam-
ple, philanthropy, volunteerism, and wildlife protection; these actions
aim to ensure the legitimacy of the firm, as well as its reputation.
GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO 11

TABLE 5 Complementary analysis for internal versus external stakeholders

TobinQ
Variables Coefficient SD
Main effects
InternalStakeholder 10.734** 5.133
ExternalStakeholder 2.515 2.108
CEOAbility 190.672*** 65.123
InternalStakeholder * CEOAbility 13.867** 6.553
ExternalStakeholder * CEOAbility −3.306 2.689
Munif 182.594*** 61.969
CEOAbility * Munif 0.002 0.007
InternalStakeholder * Munif 10.327** 4.860
ExternalStakeholder * Munif −2.388 1.993
InternalStakeholder * CEOAbility * Munif 13.339** 6.206
ExternalStakeholder * CEOAbility * Munif 3.142 2.542
Control variables, industry, country, and year Controlled
Z 245.24
m1 −5.81
m2 −2.68
Hansen 127.95

Note. N = 6,442 firm‐year observations. Estimated coefficients and associated standard errors are reported. CEO: chief executive officer.
*p < 0.10. **p < 0.05. ***p < 0.01.

In this sense, the impact that CSR practices related to internal and
external stakeholders have on financial performance in managerial dis-
cretion contexts accounts for managerial ability. Accordingly, our CSR
items were grouped following the design used by Cruz et al. (2014)
and Rodríguez‐Ariza et al. (2017): orientation to internal stakeholders
and orientation to external stakeholders. More specifically, and follow-
ing the criteria of Rodríguez‐Ariza et al. (2017), “ExternalStakeholder”
covers procedures, policies, and systems related to human rights, envi-
ronmental issues, customer–supplier issues, and other stakeholders'
projects. Meanwhile, “InternalStakeholder” covers practices and issues
related to employee policies, procedures, and systems and governance
practices.
Examining the consequences on firm performance, Table 5
reports that those CSR dimensions related to internal stakeholders
are the ones that lead to higher performance (coef. 10.734,
p < 0.05), with this effect being greater when CEOs' ability is higher
(coef. 13.867, p < 0.05) and even more when CEOs promote these
investments under a high managerial discretion (coef. 13.339,
p < 0.05). Then, the monetary impact that CSR investments related
to internal stakeholders have on firm value is higher when the strate-
gic decisions are taken by able CEOs and even more in managerial dis-
cretion contexts.
The CSR dimensions related to external stakeholders do not lead
to greater firm performance. It is at least consequence of only CSR
associated to internal stakeholders can create value for the share-
holders, thus increasing firm performance. CEOs that are more able
can realize more CSR‐related investment for the internal stakeholder
due to their economic relevance for shareholders. This group exerts
a powerful role in ensuring the survival of the firm and its legitimacy
and, moreover, in perpetuating their control and influence (Berrone,
Cruz, Gomez Mejia, & Larraza Kintana, 2010). But the CEOs aim to
meet the external stakeholders' demands, which allows them to create
confident relations; however, we do not report a positive impact of
CSR practices related to external stakeholders' dimensions on firm
performance, even accounting for managerial ability and munificence.
5 | CO NC LUSIO NS
Using a sample of 956 international firms over the period of 2006–
2014, this paper aims to examine the impact of CSR performance on
financial performance focusing on the CEOs' ability and the environ-
mental context. By proposing several regression models using the gen-
eralized method of moments estimator of Arellano and Bond (1991),
we find the following insights. As proposed, firms' market value
increases because of these socially responsible investments over time
but decreases under irresponsible activities regarding CSR. The posi-
tive influence of a CEO's ability on CSR strengths is even greater in
munificent environments. In other words, the monetary impact that
socially responsible investments have on firm value is higher when
the strategic decisions are taken by able CEOs and even more so in
managerial discretion contexts. Our results are robust by proposing
different measures for the main variables of analyses. In addition, we
propose some complementary analyses; in them, we find that the pos-
itive relationship between CSR strengths and financial performance is
exacerbated by the CEO's ability and by munificence as an environ-
mental condition when CSR dimensions are related to internal
stakeholders.
Theoretically, we contributed to the academy by providing evi-
dence to the upper echelon theory by determining the role that the
CEO's ability has in CSR leadership, as well as on CSR consequences
and causes. In this vein, we show that in addition to the demographic
12
characteristics and personality of the CEOs, the decisions they make
in the field of CSR are oriented to satisfy all the participants, including
the interest of the shareholders associated with the value creation.
Therefore, the most able CEOs have a greater managerial ability to
determine the return on CSR investments and to show a greater toler-
ance for uncertainty that leads them to be more aligned with long‐
term corporate objectives.
Moreover, even if CSR strategy is not vital for the company in
order to guarantee its survival, managerial ability avoids social and
environmental actions that may be more oriented to their own per-
sonal benefits. Furthermore, they do not overinvest in CSR projects
aimed at “doing the right thing,” acting in accordance with their values
and beliefs. The above‐mentioned decisions will likely provide the
CEO with greater personal satisfaction but may not add (and may even
reduce) shareholder value. However, able CEOs have a stronger pref-
erence for internal stakeholders' demands over external ones due to
their higher impact on value added for shareholders. These managerial
decisions could explain their limited role in terms of CSR concerns.
Our paper presents some practical implications regarding the rel-
evance of CSR strategy on society and policymakers. From our
insights, it is necessary to understand that managers and CEOs are
concerned with their career prospects and personal concerns, aspects
that determine and affect strategic decisions. When policymakers
motivate CEOs to promote a CSR strategy, it is necessary to take into
consideration the personal attributes of the CEOs and, in particular,
their career concerns. For instance, policymakers could associate
CEOs' salary with CSR indicators or establish long‐term stock options
linked to superior firm performance—they will show, then, a greater
commitment to promoting CSR practices for increasing this perfor-
mance. For managers, it is important to understand the positive bene-
fits associated with CSR, despite the fact that they will be in the long
term. Understanding them allows them to increase the market labour
assessment and increases their career prospects and professional
options. Moreover, it is also necessary to examine the munificent con-
text in which firms operate in order to assess the availability of
resources that can be allocated to CSR activities and then increase
firm performance. For firms, our results show the great importance
of CSR in increasing corporate performance and also the need to con-
sider CEOs' career concerns and ability to adequately invest in these
activities, particularly in managerial discretion contexts.
This paper is subject to some limitations. The first limitation is
related to the CSR measure, such as the nonweighted sum of different
environmental and social performance indicators in terms of strengths
and concerns, on the basis of numerical scales. We are cautious about
the possible bias included in this, because it may not capture the true
underlying practices. Moreover, we only examine CSR strengths and
concerns as a global measure without examining each CSR area.
Future research could test the robustness of our findings by using
alternative CSR databases, such as ASSET4 or KLD—for specific
regions. Second, we consider only munificence as an environmental
dimension; however, additional dimensions, such as dynamism and
complexity, could be examined in future studies to provide additional
insights. Third, our sample consists only of public firms from 28 coun-
tries, with a notable bias towards the U.S. and U.K. firms. But, as Chen
et al. (2017) point out, reliable data on nonlisted firms are difficult to
GARCÍA‐SÁNCHEZ AND MARTÍNEZ‐FERRERO
obtain. Future research could explore our evidence in nonlisted and
small‐ and medium‐size businesses and expand the sample of analysis
to additional countries. In addition, the academics should be oriented
to understanding in more depth not only the role that the CEO's ability
plays in the selection of CSR strategies but also features such as his or
her creativity and originality, which would allow a greater knowledge
of the importance of the CEO's talent in a society that is moving inex-
orably towards the industry 4.0.
ACKNOWLEDGEMENTS
The authors wish to acknowledge the financial support from the Min-
istry of Science and Innovation for the research project ECO2013‐
43838P and from the University of Salamanca for the research project
DISAQ. Any errors included in this paper are sole responsibility of the
authors.
ORCID
Isabel‐María García‐Sánchez https://orcid.org/0000-0003-4711-
8631
Jennifer Martínez‐Ferrero https://orcid.org/0000-0001-8387-1466
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How to cite this article: García‐Sánchez I‐M, Martínez‐
Ferrero J. Chief executive officer ability, corporate social respon-
sibility, and financial performance: The moderating role of the
environment. Bus Strat Env. 2018;1–14. https://doi.org/
10.1002/bse.2263