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Managerial Efficiency, Corporate Social Performance, and Corporate Financial

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Article in Journal of Business Ethics · August 2019

DOI: 10.1007/s10551-017-3760-7

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 Managerial Efficiency, Corporate Social Performance, and Corporate Financial
Performance

Seong Y. Cho
Associate Professor
Department of Accounting and Finance
School of Business Administration
Oakland University
cho@oakland.edu

Cheol Lee*
Associate Professor
Department of Accounting
Mike Ilitch School of Business
Wayne State University
cheol@wayne.edu

October 2017

* Corresponding author: 207 Rands House 5229 Cass Avenue Detroit, MI, 48202. Tel) 313-577-2242.
 Managerial Efficiency, Corporate Social Performance, and Corporate Financial
Performance

Abstract: Managers face an ethical dilemma in the allocation of scarce resources to corporate
social responsibility (CSR) because the underlying managerial incentives behind such CSR
spending can range from pure altruism to complete financial orientation. Despite the importance
of the managerial role in implementing CSR, prior studies generally have treated the role of
managers as an exogenous factor. This study builds on recent studies on the managerial
characteristics in studies on CSR by examining how managerial efficiency influences the
outcomes of CSR. Using a newly developed measure of managerial efficiency, we find that, on
average, managerial efficiency is positively associated with a subsequent change in corporate
social performance (CSP), although the association is weak in the level of total CSP. We find
that efficient managers are more likely to engage in the product-related CSR that directly
connects to corporate financial performance (CFP) but are less likely to engage in environment-
related CSR. We also find that CSP is positively associated with CFP with efficient managers.
Our findings contribute to management and other stakeholders’ understanding of the association
of CSR to its outcomes, CSP and/or CFP, which is hinged by the indispensable moderating role
of managerial efficiency.

JEL Classification: G30, G34, L21, M14

Keywords: Managerial Efficiency, Corporate Social Responsibility, Corporate Social

Performance, Corporate Financial Performance, Ethical Corporate Social Responsibility

Abbreviations:

Corporate social responsibility (CSR). CSR refers to a firm’s engagement in areas that benefit
society in general, such as environmental protection, community contribution, customer
relationship, labor issues, and diversity of employment.

Corporate social performance (CSP). CSP refers to the outcome (or overall quality) of a firm’s
programs or investment in CSR and is judged by a third-party rating agency or organization in
lieu of stakeholders’ assessments.

Corporate financial performance (CFP). CFP represents firm value in terms of the joint effect of
financial (tangible) and nonfinancial (intangible) value drivers.

1
1. Introduction

Over the past few decades, corporate social responsibility (CSR) activities have become

increasingly essential to a firm’s operation. While there is no single agreed-upon definition, CSR

has traditionally referred to actions to enhance social goods at least partially beyond the firm’s

immediate economic interests. It can be narrowly limited to purely voluntary philanthropic or

ethical engagements to society but CSR may extend to actions triggered by economic orientation

and even legal requirements (e.g., Carroll 1991, 2016). In this study, consistent with Carroll’s

view (1991, 2016), we take a comprehensive definition of CSR including all external and

internal actions involving environmental protection, community contribution, customer

relationship, labor issues, product quality, and diversity of employment. Also, along with this

comprehensive definition of CSR, we view that several different incentives of CSR can coexist

in a firm’s CSR activity.

Indeed, the importance of CSR goes beyond the philanthropic endeavors, which was

treated as an integral part of CSR, and expands to a firm’s strategic and business case for CSR

(e.g., economic oriented CSR). For example, as demonstrated by Servaes and Tamayo (2013)

and Lev, Petrovits, and Radhakrishnan (2010), customer loyalty tends to be significantly stronger

toward corporations that incorporate CSR. Moreover, assets of an international network of CSR-

focused investors, Principles for Responsible Investment, increased to a total of $59 trillion in

fiscal year 2015. To match this growing demand for CSR in recent years, more managers of

many U.S. firms have begun allocating resources to CSR more than ever before. 1 However, even

for top managers such as the chief executive officer (CEO), who has the most control over

resource allocation, it is difficult to pursue CSR because most CSR investment is frequently

1
The Principles for Responsible Investment is the international network of CSR investment signatories cofounded
by the European Commission and supported by the United Nations. Currently, more than 1,300 signatories are
involved in CSR investment. See http://www.unpri.org for information on CSR investment.

2
denigrated or criticized due to limited evidence that such spending has a positive influence on the

firm’s long-term profitability or survival. Moreover, CEOs are confronted by the dilemma in

CSR investment when they deal with acute conflicts and competitions among different

stakeholders. For example, corporate pressure on suppliers can violate human rights by pushing

down workers’ compensation of suppliers, mishandled labor relations can cause discrimination

lawsuits, or a large-scale industrial dump can cause irreversible environmental damage. In such

cases, business ethics can give some guidance in resolving the outright conflicts. Therefore, as

powerful and final decision makers, most CEOs constantly calibrate their decisions to align with

socially acceptable ethical standards. Obviously, investment in CSR is one area that involves

business ethics.

Considering the importance of business ethics in CSR investment, a long-standing

concern in academia is whether CSR activities provide financial gain to the firm. Many

researchers have investigated the consequences of CSR by focusing on corporate social

performance (CSP),2 which is rated by independent third-party agencies, through the lens of

corporate financial performance (CFP) such as accounting earnings. The findings from prior

studies on the relationship between CSP and CFP, however, are mixed. For example, Aupperle,

Carroll, and Hatfield (1985) find no relation between the two, whereas Barnett and Salomon

(2006) document a positive relation between CSP and CFP. On the contrary, Lopez, Garcia, and

Rodriguez show a negative relation between CSP and CFP. Such a lack of conclusive evidence

may be attributable to the seemingly contradictory incentives that drive CSR. That is, the

managerial incentives that precipitate CSR spending are encapsulated in a wide spectrum,

2
Unlike CSR, which refers to a firm’s programs or investment regarding social issues, CSP represents the overall
quality of such CSR-related investments as judged by a third-party rating agency or organization in lieu of
stakeholders’ assessments, because each stakeholder has a limit to accessing and evaluating the full range of CSR
activities. In addition, in contrast to CSR’s nature as a one-time commitment, CSP is cumulative and composed of
continual CSR investment (Barnett 2007).

3
dominated on one extreme by purely profit-oriented motivations and dominated on the other by

altruistic motivations. Another reason for the mixed finding of the relation between CSP and

CFP is that CFP does not work as a proxy to capture the effect of CSP beyond direct monetary

benefits. Accordingly, understanding the underlying managerial motivations of various CSR and

their consequences is important to shed light on the relation between CSP and CFP.

Stakeholder theory (Jensen 2002) suggests that a firm engages in CSR with profit-

oriented strategic objectives in response to the needs of customers, investors, employees, and

other stakeholders, which may incur short-term costs but will result in social net benefits as well

as the firm’s long-term profit (Benabou and Tirole 2010). Prior studies suggest that managers’

strategic use of CSR in business operations increases firm value (e.g., Baron 2001, McWilliams

and Siegel 2001, Bagnoli and Watts 2003). Furthermore, nonmonetary dimensions are to be

considered as benefits of CSR. For example, firms with a high level of CSP may face fewer

cases of labor-related litigation, gain recognition in the community via donations, retain the

loyalty of customers with higher quality products, and promote employee morale through better

labor relationships.

On the contrary, managers’ altruistic CSR stems from their eagerness to be sincere and

socially responsible citizens. As Baron (2001) suggests, the altruistic manager cares so much

about pollution that she may spend extra money to reduce pollutants far below a compliance

level that is already good enough to comply with regulation and meet stakeholders’ expectations.

Thus, in contrast with the profit-oriented strategic CSR aimed at enhancing monetary or

nonmonetary benefits, the underlying motivation of altruistic CSR may be disconnected from a

firm’s economic gains. Prior literature (e.g., Baron 2001, Baron and Diermeier 2007, Hillman

and Keim 2001) demonstrates that CSR implemented by altruistic managers may achieve high

4
CSP but does not necessarily increase firm value. Baron and Diermeier (2007) view this kind of

CSR cost as “an imperfect substitute for individual social giving” (p. 685).

As a middle ground of two contrasting motivations, Carroll (1991) proposes another form

of social responsibility incentive that is rooted in the fulfillment of legal requirements or ethical

responsibilities. He defines this type of CSR as performing actions in a manner consistent with

various expectations of regulators or standards which are not codified (Carroll 2016). Therefore,

this kind of ethical or socially responsible CSR can partly provide nonmonetary benefits by

reducing the risk of losing reputation. It can also reduce unnecessary costs by avoiding penalties.

In sum, the literature characterizes objectives of CSR in several dimensions, and the outcome or

benefits of CSR can be different. The literature also suggests that, coupled with an ethical

dilemma, these diverse managerial incentives highlight the important role of managerial

discretion in CSR.

We propose that managers’ particular traits, which have been omitted from consideration

in prior studies, are an important factor to determine CSP and affect the relation between CSP

and CFP. Among the many traits of managers (e.g., reputation, leadership, demographic

characteristics, style), we focus on a feasible measure of managerial efficiency that refers to the

manager-specific ability to efficiently use a firm’s tangible and intangible resources to generate

financial outcomes (Demerjian, Lev, and McVay 2012). As prior studies suggest (Slater and

Dixon-Fowler 2009; Attig and Cleary 2015; Osagie, Wesselink, Block, Lans, and Mulder 2016),

we view managerial efficiency as a key characteristic in the process of adopting CSR to organize,

implement, execute, and interact and communicate with the stakeholders of the community

outside the firm. Thus, we predict that managerial efficiency affects the choice of CSR and

5
influences the relation between CSP and CFP via managerial competence in the selected CSR

activities.

Specifically, we investigate the following two research questions: (1) whether managerial

efficiency plays a role in the execution of CSR and the achievement of high CSP, and (2) how

managerial efficiency influences the relationship between CSP and CFP. To indirectly capture

underlying managerial incentives, we consider two distinct CSR activities: (1) product-related

CSR that is associated with product quality, customer satisfaction, and safety, which will

eventually govern the generation of revenue in the future, and (2) environment-related CSR such

as installation of antipollution devices to reduce toxic wastes, which is less likely to generate

profits but possibly avoids fines or penalties. The product-related CSR activities (e.g., long-term

quality programs or notable innovation) are an example of relatively more strategic or economic-

oriented activities that are expected to provide signal product quality to consumers, contrasting

with purely profit-oriented business behavior producing products of lower quality with less costs.

We contend that the product-related CSR may lead more direct financial benefits than

environment-related CSR activities that are more likely driven by altruistic and (or) passive

ethical or legal motivation. Hence, we predict that managerial efficiency differently influences

these two CSR activities.

To test our research questions, we consider CSR activities when they are rated by Kinder,

Lydenberg, and Domini (KLD) Research and Analytics, Inc. We use the CSR rating score

published by KLD to measure CSP from 2003 to 2011. The KLD CSP score is composed of

seven areas (environment, product, labor relations, diversity, community, corporate governance,

and humanities).3 For managerial efficiency, we use the measure quantified by Demerjian et al.

3
The score is published by the end of each calendar year by the third party based on the observations and collections
of performance data independent of individual firms. Each area of the KLD score is composed of strength elements

6
(2012), who introduced a new measure of managerial ability by quantifying the degree of a

firm’s efficiency in terms of the relative yield rate of transforming the firm’s resources into

output measure (revenue, in this case, controlling for size and industry). For the empirical proxy

of CFP, we use Total Q (Peters and Taylor, 2017) to better incorporate the effect of financial and

nonfinancial aspects of CSR on firm value.4 Methodologically, we handle the causality issue

between CSP and managerial efficiency by employing a lead-lag approach (i.e., current CSP

explained by prior-year managerial efficiency). We also check the robustness with both level and

change regression models of CSP. We perform post-hoc probing analysis for the moderating

effects of managerial efficiency between CSP and CFP.

On average, we find that managerial efficiency does not significantly affect the level of

aggregated CSP, which is measured by the net total KLD CSR rating score. We interpret that this

insignificance does not imply the irrelevance of managerial efficiency to CSP. Rather, it is

plausible that the results reflect the outcome of the blending nature of different types of CSR.

Further analyses document that the moderating role of managerial efficiency appears for product-

related CSR. On the other hand, we find that there is no moderating role of managerial efficiency

on environment-related CSR. These results suggest that managerial efficiency is working in

places related to product CSR issues to enhance CSP, not in environmental issues. To control for

potential noise in the level of CSR measures, we revisit this issue by using the change of CSP

and concerns scores, and the net score of these positive and negative scores is used in similar studies. For example,
in the environment area, the aspects measured for the positive aspects are the use of a pollution prevention program,
a recycling procedure, and deployment of clean energy. If a company uses equipment or has instituted a program to
prevent pollution but the company does not have a recycling procedure or use recycled material or a clean energy
source, the score will be 1 for the environment. For the negative aspects, such as generating hazardous waste; having
problems in regulatory compliance; and producing ozone-depleting chemicals, substantial emissions, and
agriculturally toxic chemicals, the same company can score 2 by paying fines for the noncomplying emission control
problem. Then, an overall environment CSP score for this company will be -1 (1-2). The KLD score stacks all
scores from the seven areas. The full description of the seven areas and area-specific measures are provided in
Appendix A.
4
Peters and Taylor (2017) demonstrate that this measure is better to incorporate intangible investments in firm value
than the traditional Tobin’s Q.

7
measure. In contrast with the results of level analysis, we find the positive relation between the

change in CSP and the degree of managerial efficiency, interpreting as evidence that more-

efficient managers make more of an effort to improve CSP than less efficient managers.

With respect to the role of managerial efficiency in the link between CSP and CFP, we

find that the link is stronger for firms with high managerial efficiency. When we consider the

differential effect of managerial efficiency on two different types of CSP, we observe a similar

moderating role of managerial efficiency on product-related CSP to generate high long-term

benefits. These differential effects of managerial efficiency to capitalize CSP into CFP suggest

that the degree of managerial efficiency is one of the important managerial characteristics to

drive, choose, and execute CSR to generate future benefits. In addition, the results of post-hoc

probing of moderating effects are generally consistent with those of our main regression analyses.

Overall, our results imply that degree of managerial efficiency can be an ex ante indicator of

whether engaging in CSR is value creating or not.

This paper contributes to the ongoing debate regarding the relationship between CSP and

CFP in several ways. First, our study introduces and confirms the existence of managerial

efficiency among several characteristics that govern outcomes of CSR. Our findings show that

managerial efficiency is an important factor to choose and execute a firm’s CSR. Then, we

further trace its influence on the level of long-term benefits. We examine the CSR decision and

its consequences at the individual level, as Waddock and Graves (1997b) suggest that

management quality is a fundamental but unexplored factor to hinge the links between the input

and its outcome. They also call for future research with better measurement of management

quality than survey-based data (e.g., a Fortune magazine rating). Our study uncovers this

unexplored area with managerial efficiency that is more comprehensive, estimated from a larger

8
sample, and comparable across industries, which is easily applicable in experimental settings.

Our findings suggest that CSR activities generate social benefits when implemented by efficient

managers. Second, our analyses provide insights on how to interpret empirical findings in line

with competing CSR theories. Prior mixed empirical implications result from the complicated

nature of CSR practices, which are simultaneously motivated by different theories. We identify

managerial efficiency that moderates this unclear relationship between CSP and CFP.

2. Prior Literature and Hypotheses Development

In this section, we first define CSR and CSP before discussing the relationship between

CSP and CFP as addressed in prior literature. Then, we hypothesize that managerial efficiency

affects the decision to spend on CSR and plays a moderating role in executing CSR to create

firm value.

CSR and CSP

Prior literature has defined CSR as a set of voluntary corporate actions beyond legal

requirements designed to improve social conditions and social goods (e.g., McWilliams and

Siegel, 2001; Mackey, Mackey, and Barney 2007). This broadly defined CSR can be further

outlined as several different underlying managerial objectives. Carroll (1991) identifies CSR as a

spectrum of various types between two distinct and contrasting styles: economic CSR and

altruistic (or philanthropic) CSR. For example, the objective of economic CSR is in line with

stakeholder theory that views CSR as managers’ response to the demand of stakeholders such as

employees, suppliers, community, directors, creditors, and investors, who are ultimately

interested in the use of a firm’s resource to enhance firm value. Hence, the underlying objective

of a so-called economic CSR is to create value for the firm, particularly long-term monetary

benefits.

9
 In contrast to more business-oriented economic CSR, altruistic CSR has little connection

to such profit-oriented motivation. Instead, altruistic CSR refers to voluntary behavior (e.g.,

charitable contribution or donation) beyond what business is required to accomplish business

goals or to prevent possible harm to public. Accordingly, prior studies characterize altruistic

CSR as managerial investment with value-irrelevant or value-decreasing activities. Carroll

(1991) names another dimension between economic and altruistic CSR: ethical or legal CSR

(e.g., community donation and extra spending on environmental protection), which typically

responds to legal or ethical fulfillment. This passive CSR spending may result in a high level of

sustainability, but the effect of such CSR spending on firm value is not clear. In this study, we

view that potential objectives related to CSR vary between the two extreme types. That is,

managers decide on CSR investment on the basis of different motivations or by considering

multiple objectives simultaneously.

While there are various underlying motivations and types of CSR, the outcomes of CSR

are usually evaluated by independent rating agencies or organizations. In the literature, CSR

rating scores by such independent entities refer to CSP. Even though these scores cannot fully

capture the actual consequences, researchers and practitioners generally use these scores as

proxies for CSP. The reason is that the rating agencies, including KLD, use numerous sources

within the full range of a firm’s CSR activities, to which other stakeholders have very limited

access. The sources that rating agencies utilize include not only a firm’s financial reports but also

the agencies’ own analyses of media, surveys, and government reports as well. As in the prior

studies, we use the KLD rating score as a proxy for a firm’s CSP.

Managerial Efficiency and CSP (H1)

10
 We consider managerial discretion as a key moderator in CSR investment based on the

upper echelons theory (Hambrick and Mason 1984, Hambrick 2007) depending on the context of

CSR. The theory suggests that qualities and characteristics of top managers (i.e., the upper

echelon of an organization) determine a firm’s strategic decisions. 5 According to Hambrick and

Mason (1984), the characteristics of the CEO or senior management teams are associated with

past individual experience, value, and educational background. This tangible and intangible

expert knowledge and these characteristics enable top-level managers to make efficient and

valuable decisions.

For CSR investment, the top manager formulates a firm’s strategic choice and her beliefs

of social responsibility. McGuire, Dow, and Argheyd (2003) conclude that “strong social

performance may be primarily driven by managerial belief.” Moreover, the unique aspect of

CSR investment can highlight the manager’s role because the outcome of CSR is not always

immediately measurable and has an intangible nature. Instead, potential benefits of CSR are not

instantly visible or realized, but are often accompanied by a costly financial burden. Thus, CSR

spending calls for managerial discretion to make decisions on whether to engage in CSR and

which CSR activities to choose.

In this study, we use managerial efficiency defined as the degree of management’s

specific ability to generate revenue using a firm’s tangible and intangible resources consistent

with Demerjian et al. (2012). Managerial efficiency can influence CSR in two ways. First, given

different objectives of CSR, managerial efficiency becomes a factor in determining CSR

5
Corporate governance is another important intermediary that affects the relationship between CSP and corporate
financial performance. As stated in Hong, Li, and Minor (2016), if managers use CSR to maximize all stakeholders’
value, corporate governance is likely to promote CSR and thus improve corporate financial performance. On the
other hand, if managers’ engagement in CSR is an agency cost, corporate governance is likely to reduce CSR
activities. In this study, we do not directly test the role of corporate governance because of our interest in managerial
efficiency. However, we conduct a sensitivity test by using a separate independent variable of the governance KLD
score from our main variable of CSP. Untabulated results indicate that results based on the new measure of CSP
(excluding governance score) are consistent with our main findings.

11
investment and selecting certain areas of CSR. For example, because a firm usually has fewer

resources than needed to satisfy needs of all stakeholders, an efficient manager may seek CSR as

a corporate strategy (i.e., economic CSR) or may forgo CSR investment.6 Next, if managers

determine CSR investment, then they decide on which area to focus, such as economic CSR,

altruistic CSR, or a combination of these two with ethical consideration. Second, managerial

efficiency affects the quality of the execution of CSR. Prior studies (e.g., Chakravarthy 1986,

Koch and Cebula 1994) suggest that effective managers should be able to meet or adapt to the

expectations of a new environment, such as the stakeholders or the society in which the

corporation operates. Thus, the degree of managerial efficiency can ultimately affect firm value

via the manager’s competence with the underlying motivation of CSP. Figure 1 summarizes the

conceptual framework of our study regarding the role of managerial efficiency.

[Insert Figure 1 here]

One potential influence of managerial efficiency is a positive effect on achieving high

CSP. Several studies (Slater and Dixon-Fowler 2009, Attig and Cleary 2015, Osagie et al. 2016)

suggest that characteristics of management determine the outcome of CSR. Slater and Dixon-

Fowler (2009) show that the past experience of the CEO increases CSP with the allocation of

limited resources. They demonstrate the need of human capital to command the responsible,

innovative execution of complex tasks. Attig and Cleary (2015) also show that high-quality

management practice leads to high CSP. Their study views management quality as

organizational capital that can efficiently derive outcomes. Osagie et al. (2016) summarized

6
It is worth noting that we use the term “limited resource” to refer the firm’s general and fundamental economic
situation in which a firm has fewer resources to fill all (unlimited) needs from the firm’s stakeholders (i.e., economic
scarcity). Therefore, the term limited resource does not necessarily mean a firm’s financial constraint, which
indicates a firm’s situation facing high costs of external financing (or a shortage of internal funding), or a firm’s
financial distress indicating a difficulty to pay off a firm’s financial obligation.

12
managerial competence as a key moderator for CSR performance in their meta-analysis. From

these findings, we confirm that managerial efficiency can be a moderator to determine CSR

projects to achieve high CSP.

On the other hand, some CSR activities are ruled out by the strategic choices that pursue

economic efficiency. As noted in the previous study by Carroll (1991), CSR choices have a wide

spectrum, and at one extreme end is the altruistic choice of CSR. The altruistic CSR includes a

donation to education or social programs or participation in environmental protection programs

that are rarely picked up by strategy-oriented managers who act based on the principle of

efficiency. As a result, an efficient manager is less likely to achieve the goals of certain CSR

such as the community contribution or environmental protection aspect of CSP. In this case, the

managerial efficiency will negatively influence CSP. Carroll (1991) suggests a mixed incentive

that comes from the middle ground of strategic and altruistic CSR choices that does not

necessarily reflect managerial efficiency. Using scarce resources to just comply with government

regulations would not be connected with efficiency. So, either from altruistic purposes or to meet

the ethical requirements, non-economic CSP will not generate any benefits, and it will be

considered inefficient.

In sum, managerial efficiency is viewed as one of the main characteristics that moderates

the process of adopting CSR and achieving high CSP, because underlying managerial incentives

(strategic, altruistic, or ethical) govern the choices of CSR that result in a higher outcome of CSP.

So, assuming that a firm usually deals with limited resources, the strategic choice of CSR

predicts a positive influence of managerial efficiency on the CSR-CSP relation, while the

altruistic or ethical choice of CSR predicts a negative influence of managerial efficiency on

13
CSR-CSP. Therefore, we formulate our first hypothesis on the relationship between managerial

efficiency and CSP as follows with no prediction on the direction:

H1a: The degree of managerial efficiency affects the level of CSP.

To provide additional insight into the first hypothesis (H1a), we examine two specific

dimensions of CSP that reflect the distinct underlying incentives for CSR: product-related CSP

and environment-related CSP. We view the former as the choice of strategic or economic CSR

and the latter as the altruistic or ethical CSR. Product-related CSP captures CSR activities related

to new product (service) development, logistical supply chain enhancement, and risk-reducing

product line initiatives that directly increase efficiency and save cost. This type of CSR

investment is distinct from other product-related activities lacking CSR, such as production of

low quality products with minimal costs and without innovative R&D. In the short run, the net

financial benefits from product-related CSP may be lower than those from product-related

activities without CSR engagement, but product-related CSP may lead to an increase in product

loyalty and build up positive image of the product, resulting in valuable signals to customers. So,

product-related CSP is likely to directly connect to a firm’s value through potential financial

benefits that require efficient use of resources. On the other hand, we view environment-related

CSP as relatively ethical or altruistic CSR (non-economic CSR) that requires a relatively passive

commitment but hurts the overall efficiency of resource allocation. Many firms engage in

environmental CSR activities to comply with governmental regulations or social beliefs, but they

do not require any sophisticated operation to achieve maximum benefit.7 In that case, the

7
The response from managers to the regulation can vary according to how managerial discretion
is exercised. If a firm chooses a minimum level of environmental CSR investments up to the
expected penalties or fines on the non-compliance, the benefits (i.e., saving penalties or fines)
from this CSR can be offset with the cost of CSR (i.e., investment on CSR), resulting in zero

14
ultimate benefit of environmental protection will be shared by the community, but it is not a

direct financial benefit to the firm.

We view CSR activities as a combination of relatively economic CSR and non-economic

CSR and then predict that more-efficient managers are likely to use their resources for relatively

economic-oriented CSR rather than relatively non-economic CSR. We argue that CSR spending,

for managers pursuing high efficiency, is less likely to be a top priority of a firm’s investment

opportunity set because a firm’s resources are limited and the expected benefits from CSR

investment are uncertain. Indeed, ceteris paribus, efficient managers will use limited resources to

invest fixed assets or research and development prior to spending in CSR. Moreover, if managers

have a strong ability to efficiently use their assets for business operations, they will choose more-

strategic CSR such as product-related CSR rather than ethical or altruistic environment-related

CSR. A line of studies (e.g., Hillman and Keim 2001; Jayachandran, Kalaignanam, and Elert

2013) support our prediction by suggesting that the associations between managerial efficiency

and CSP depend on the specific facets of CSR activities. However, our argument does not mean

that the main objective of CSR is only monetary-driven action and that efficient managers ignore

non-economic CSR. Instead, we conjecture that managerial efficiency may drive managers to

subordinate non-economic CSR in a firm’s efficient frontier. Based on the above argument, we

propose the following hypothesis:

H1b: Managerial efficiency differently affects product-related CSP and environment-

related CSP.

Managerial Efficiency and the CSP-CFP Relation (H2)

profit. Likewise, if a manager voluntarily chooses higher environmental standards than the
regulated ones, the costs of the environment-related CSR exceed the potential direct benefits.

15
 Margolis, Elfenbein, and Walsh (2009) indicate that the common average positive

relationship between CSP and CFP is surprisingly small (r = 0.13), or only 28% of the studies

show a positive relation, whereas 59% of studies show insignificant results. Even with various

moderators and conditions to study the CSP-CFP relation, the prior studies overlooked the role

of managerial efficiency as an important moderator in the CSP-CFP relation. As discussed in the

previous section, we argue that managerial efficiency can moderate this relation as two channels

of a determinant of the heterogeneous aspects of CSR activities rooted in various financial and

nonfinancial benefits and the high degree of competence in the selected CSR aligning with

underlying objectives.

First, in connecting to H1, the degree of managerial efficiency affects CFP via a

particular type of CSP motivated by managerial incentives. Carroll and Shabana (2010) indicate

that certain CSR activities reduce business risks related to a firm’s technical, market, and

political aspects in running a business. This immediate monetary benefit from CSR gives

managers incentives to engage in CSR for their compensation tied to the firm’s financial

performance. In this case, more efficient managers can select strategic CSR as a sustainable

business strategy not only because of the demand of stakeholders but also for the managers’ own

interests, suggesting the potential positive influence of managerial efficiency on strategic CSR-

CFP relation.

Managerial efficiency also can garner nonfinancial benefits from strategic CSR. It is well

known that another consequence of CSR is future long-term economic benefits that are not

captured as immediate monetary rewards (e.g., Lubin and Esty, 2010; Kiron, Kruschwitz,

Haananes, and Velken, 2012). These nonmonetary benefits of CSR incur temporary costs to

firms, but they are expected to bring future benefits that exceed current costs in the long run.

16
Intangible and nonmonetary benefits include an influence on attracting customers that results in

customer loyalty (Bhattacharya and Sen 2003, Barnett 2007), employee morale and retention that

will eventually increase productivity, a firm reputation among the public that will decrease the

risk of litigation (Godfrey 2005, Williams and Barrett 2000), or product differentiation and the

intangible benefits of improving customer loyalty (McWilliams and Siegel 2001). Because

efficient managers will care for the use of resources and its benefits, these potential nonmonetary

benefits of CSR will motivate such managers to allocate resources in CSR. Thus, we predict that

more-efficient managers pursue CSR as long as the benefits of CSR can improve CFP. This leads

us to predict the positive influence of managerial efficiency on the CSP-CFP relation.

On the contrary, the role of managerial efficiency can differ when managers have

altruistic motivations. Especially when a firm has abundant resources, the altruistic manager of

the firm is more likely to use the extra cash to create CSR programs not to generate any benefit

but to act as a good citizen (Kang, Germann, and Grewal 2016). Thus, the CSR has priority in

the altruistic decision ahead of benefit-generating alternatives, which may result in the inefficient

use of resources. In contrast with efficient strategic CSR activities, philanthropic incentives of

CSR can result in bad financial performance without any other benefits of securing sustainable

business. Indeed, pure altruism leads managers to use too many resources on CSR activities

beyond the optimal level; in other words, the marginal costs of altruistic CSR are greater than

marginal benefits of such CSR. 8 Thus, this altruistic CSR spending can have a negative impact

on the wealth of stakeholders (Baron 2001). So, in this view, CSR activities result in

nonproductive investments and increase proprietary costs, leading to the loss of a competitive

edge in the market, ultimately decreasing the firm’s value and imposing additional stakeholder

8
We refer to the optimal level in the context of economic optimality that marginal benefits are equal to marginal
costs. Since the economic marginal benefit from pure altruism is likely to lower than economic marginal costs of
such CSR, the CSR investment rooted in pure altruism leads to sub-optimal investment.

17
costs. Under the realistic business environment with limited resources, this altruistic

management will not be generally viewed as an efficient manager in terms of resource

allocation.9

Importantly, another channel of the moderating role of manager is managerial

competency in the selected CSR activities, because more-efficient managers are likely to be

competent, and they are therefore expected to implement CSR investment more effectively than

inefficient managers. Osagie et al. (2016) suggest a manager’s individual competency can

influence the effectiveness of CSP. In line with Osagie et al. (2016), we view managerial

efficiency as the key attribute of management competency. Our measure of managerial

efficiency is supposed to capture how well a manager executes business operations with all of

the firm’s available resources to generate ultimate financial gain. Accordingly, if a manager

chooses economically oriented CSRs, we predict that the CSP-CFP relation would be much

stronger when efficient managers implement CSR. This prediction can also work for altruistic

CSP. For example, when managers can primarily pursue altruistic CSR with resource slack, the

contribution to CFP is not clear in conjunction with the degree of managerial efficiency.

However, even if managers spend on altruistic CSR, more efficient managers may implement

altruistic CSR for “insurance-like” effects,10 which makes managers immune to future loss

because of the risk to their reputation (e.g., Godfrey 2005; Shiu and Yang 2017), rather than for

9
Outcomes that are similar to those from altruistic incentives can be caused by management entrenchment, too. For
example, Johnston (2005) argues that managers use CSR to greenwash unethical choices that firms make or to hide
poor financial performance. Furthermore, in line with agency theory, top managers’ inflated self-confidence due to
hubris may drive them to underestimate strategic need but to overestimate the resources in their hands to promote
their own empire building (Malmendier and Tate 2005). Similarly, CSR motivated by management entrenchment
will result in an inefficient management of resources such that even with high CSP, there will be a negative
influence on the CSP-CFP relation.
10
The insurance effects of CSR refer to a case in which CSR activities can mitigate or reduce the impact of the
occurrence of a negative event. For example, building a good reputation via long-term CSR engagement (i.e.,
insurance premium) can mitigate the decrease in stock price (i.e., insurance coverage) when the firm announces bad
news (e.g., the SEC’s investigation of securities fraud).

18
managerial self-interest with value-irrelevant or value-decreasing spending. We predict that the

relation between CSP and CFP can be stronger when more-efficient managers invest in CSR

because of more strategic choices and high managerial competency

While our main interest is the role of managerial efficiency in the relation between CSP

and CFP, we first state a general hypothesis regarding the relation between CSP and CFP (H2).

As discussed earlier, because the relation between CSP and CFP is inconclusive, our prediction

on this relation is also non-directional. We then extend our general hypothesis, specifically

aiming at the role of managerial efficiency as H2a and H2b. These discussions lead to the

following hypotheses:

H2: A firm’s CSP is associated with its CFP.

H2a: The association between CSP and CFP is stronger for firms with efficient managers
than for firms with inefficient managers.

For the two subdimensions of CSP, product-related CSP and environment-related CSP,

we can use a similar logic employed to derive the prior hypotheses. Given different objectives of

the two CSPs, we expect that the relation of product-related CSP and CFP is stronger than that of

environment-related CSP and CFP. Moreover, when we consider the moderating role of

managerial efficiency, we predict that the effects of product-related CSP with efficient managers

on CFP may differ from those with inefficient managers on CFP because of the managerial

effectiveness of implementing CSR. However, we do not predict a difference in efficiency

effects on the relation of environment-related CSP and CFP because the relation is influenced by

other factors, such as altruism, rather than efficiency. Accordingly, we formulate another

hypothesis as follows:

H2b: The positive association between product-related CSP and CFP is stronger for firms
with efficient mangers than for firms with inefficient managers.

19
3. Sample and Research Design

Sample

Our initial sample includes firms common to the Compustat annual file, Center for

Research in Securities Prices (CRSP) monthly returns file, and KLD database for the years 2003

through 2011. We use Compustat data to estimate the variable of managerial efficiency and

necessary control variables. To measure CSP, we use the KLD CSR performance scores

(strengths and concerns) from seven categories. We also use the CRSP return file to calculate

standard deviation and mean value of stock returns for a proxy of the firm’s information

environment. From this initial sample, we delete firms in financial institutions (SIC codes

between 6000 and 6999) because of different operations of firms in the financial sector. We also

exclude firms with negative book value of equity. Finally, we require the lagged variable of KLD

scores to assess the role of managerial efficiency in change of CSP. This sample selection

procedure yields 11,037 firm-year observations.

Corporate Social Performance (CSP)

To test our research questions, we use the KLD STATS score to measure CSP from 2003

to 2011 as commonly used in prior studies (e.g., Waddock and Graves 1997a; Hillman and Keim

2001; Deng, Kang, and Low 2013). KLD is one of the oldest and most influential social

responsibility rating agencies. While stakeholders cannot catch the full range of numerous CSR

activities and they have limited access to the actual outcome of such CSR investments, the rating

agency intermediates transparent and comprehensive information about CSP measure. Using

various financial and nonfinancial reporting sources such as surveys, media, articles in academic

journals, and government reports, KLD evaluates CSP in seven categories of CSR: corporate

governance, community, diversity, employee relations, environment, products, and human rights.

20
For each category, KLD collects scores for positive (strengths) and negative (concerns) aspects

of CSR (high strengths are high CSP and high concerns are low CSP). The scores are the sum of

zero or one, with numbers given for several elements in each category (see Appendix A for

details). For example, the total number of positive elements in the product category is four for

both strength and concerns elements. Thus, the range of category score for strength or concerns

score is from zero to four and the category score can range from - 4 to + 4 when we calculate the

net score (strength score minus concerns score) for the product category as other studies use.

Likewise, the KLD score provides both categorical aggregation of elements binary score (zero or

one for each element) in strengths and concerns for seven categories.

One difficulty of using these raw scores of KLD performance indicators is its comove in

each year (Manescu 2009). Thus, it is difficult to compare CSP across years and dimensions. To

address this concern, we calculate the net weighted adjusted CSP score, converting each

categorical strength and concern as the proportion to the maximum score for the category. Then,

we calculate the net weight as (weighted adjusted CSR strengths score – weighted adjusted CSR

concerns score), following Deng et al. (2013). So, this net weight treats each category equally

and each category score will be standardized to range from -1 to 1. When aggregated as total net

CSP, it ranges from -7 to +7. To test for the differential effects in specific areas of interest among

seven KLD summary categories (H1b and H2b), we use a single category score of product-

related and environmental issues, which ranges from -1 to +1.

Managerial Efficiency

We use the managerial efficiency (ME) measure developed by Demerjian et al. (2012) to

assess the important trait of manager. Demerjian et al. modeled this measure by employing data

envelopment analysis (DEA), which is used for assessing the relative efficiency of business

21
entities, to estimate firm efficiency in each industry. They define the DEA objective function

with input factors of firm efficiency (i.e., cost of goods sold; selling and administrative expenses;

net property, plant, and equipment [PP&E]; net operating leases; net R&D; purchased goodwill;

and other intangible assets) to generate the output factor of sales:

Sales
max  .   COGS   SG & A   PPE   OPLEASE   R & D   Goodwill   In tan .
1 2 3 4 5 6 7
(1)

This optimization process generates the total relative efficiency measure at firm level in its

estimation group using the optimal combination of input factors. Demerjian et al. (2012) assign

one for the most efficient firm and zero for the least efficient one.

Next, because the total firm efficiency is driven by firm-specific factors (e.g., firm size,

market share, positive free cash flows, life cycle of firm, and diversification or complexity of

firm operations) and management-specific factors, Demerjian et al. (2012) attempt to separate

management-specific factors from total firm efficiency. They capture management-specific firm

efficiency from the following Tobit regression as regression residual value:

Firm Efficiencyit  1   2 Sizeit   3 Market Shareit   4 Positive Free Cash Flowit

  5 Ln ( Age) it   6 Bu sin ess Concentrat ion (2)
  7 Foreign Currency Indicatorit  Year Indicator   it .

Consistent with Demerjian et al. (2012), we use the raw value of the residual and decile

ranked regression residual value across the firm-years and industry in our main analyses. Recent

studies confirm the validity of this measure in terms of credible management disclosure (Baik,

Farber, and Lee 2011) and high earnings quality (Demerjian, Lewis, Lev, and McVay 2013).

Corporate Financial Performance (CFP)

When we operationalize the variable of CFP, the main concern is how the empirical

proxy of CFP can better capture the effect of dynamic CSR with financial and non-financial

22
outcomes on firm values. In this study, we use Total Q (Peters and Taylor 2017) as a proxy of

CFP associated with CSP. Peters and Taylor (2017) introduce this new metric as firm value

deflated by the sum of physical and intangible capital as follows:

Vit
Total Q  ,
K phy
it  K itint

where K itphy is the book value of property, plant, and equipment (Compustat item PPEGT) and

K itint is the book value of intangible assets (Compustat item ITAN), and Vit is the market value of

equity (Compustat items PRCC_F times CSHO) plus book value of debt (Compustat Items

DLTT + DLC) minus current assets (Compustat item ACT). Total Q is intended to overcome the

limitation of Tobin’s Q, a popular measure of capturing firm value assessing mainly by the

physical investment, because Total Q incorporates equally the investment of physical assets and

intangible assets. We believe that Total Q is a better measure than Tobin’s Q in our test setting

because: (1) one of the main elements of Total Q is market value of equity in the stock market,

and (2) Total Q considers intangible assets as a key driver of firm value. It is well known that the

investor reacts to not only current financial indicators but also nonfinancial and long-term,

forward-looking qualitative value indicators. For example, CSR activity aiming at product

innovation in a socially responsible manner or altruistic funding for the local community is less

likely to contribute to the current financial outcome (e.g., earnings) but is likely to improve

future economic performance because successful CSR activity can increase customer satisfaction

or enhance brand image. Thus, Total Q is expected to capture this kind of future value through

stock price. In addition, like most intangible assets, which are significant and growing value

drivers but rarely quantifiable resources, the nature and potential benefits of CSR are similar to

23
intangibles. Taken together, we expect that Total Q can be a better measure to reflect the

intangible nature of CSR.11

Regression Models

To test the first hypothesis, we estimate the following regression model:

CSPmeasure it  1   2 MEit 1   3 ROAit   4 SIZEit 1   5 LEVit   6 INSTit

(3)
  7 M _ RETit   8 STD _ RETit   it ,

where CSPmeasure is the total aggregated net score of weighted KLD performance scores and

ME is the measure of managerial efficiency as defined before. As we elaborated in our

hypothesis development, we use the managerial efficiency of the prior year.12 Next, we control

for firm performance in accounting profit (ROA) and mean value of annual buy-and-hold stock

returns (M_RET) for the fiscal period. Also, as suggested in the information asymmetry and CSP

literature (Cho, Lee, and Pfeiffer 2013), we control for the percentage of institutional ownership

(INST), risk measures of leverage (LEV), and annual standard deviation of daily stock returns

(STD_RET). Finally, we include the size variable measured by the log of lagged total assets

(SIZE) to control for potential endogeneity of CSPmeasure determined by a firm’s size. In

equation (3), if firms with more-efficient managers are more (or less) likely to engage in CSR,

we predict that the coefficient of our measure of managerial efficiency, (ME),  2 , will be positive

(negative). We run the same regression for the single-category-based CSP measures: product-

11
An alternative proxy of CFP is stock return (or cumulated abnormal return) regarding the report of the KLD CSR
score. While change in stock price can be a good indicator for both current financial performance and future
nonfinancial performance, we use Total Q rather than stock returns or any short-term window abnormal returns
because stock returns without a clear event window provide a “noise” indicator. Unlike an accounting earnings
announcement, KLD does not provide any specific announcement date, so it is difficult to match a relevant testing
returns window.
12
While we adopt the lag-lead testing approach to clarify the causal relationship between managerial efficiency and
CSP (and corporate financial performance), there is still a potential endogeneity issue when able managers engage in
CSR activities. We conduct additional tests using a two-stage regression model to control for potential endogeneity.
In the first-stage regression, we obtain a predictive value of CSP and use it in the second-stage regression on
corporate financial performance. The untabulated results are qualitatively consistent with our main findings.

24
related CSPmeasure and environment-related CSPmeasure. With these variables, we can test if

there is any difference in the influence of managerial efficiency on CSP.

To test our second research question about the moderating role of managerial efficiency

on the relationship between CSP and CFP, we run a regression for two subgroups of efficient and

inefficient managers partitioned based on the median value of managerial efficiency (ME). Then,

we can compare the CSP-CFP relations from each regression to test for the differential effect of

managerial efficiency on achieving high CFP with high CSP. For CFP, we use the long-term

perspective measure of Total Q (TOTALQ) that includes the value of tangible and intangible

future growth potential. Thus, we form the following model using Total Q as our measure for

firm performance:

TOTALQ it  1   2CSPmeasure it   3 ROAit   4 SIZEit 1   5 LEVit   6 INSTit   7GROWTH it

(4)
 8 STD _ RETit   2it ,

where GROWTH is sales growth.

From each subgroup, we obtain coefficients on the CSP term,  2 , which captures the

relation of CSP and CFP. Then we test for the moderating role of managerial efficiency on CSR

by comparing those coefficients across two groups (efficient and inefficient managers). The prior

literature suggests that CSP is a forward-looking measure that indicates future value creation.

Thus, we expect a positive association between CSP and TOTALQ. Furthermore, as we argued in

the previous section, managerial efficiency will play a key role in capitalizing on such CSR to

achieve high CFP. As we built our argument in the hypotheses, high managerial efficiency can

transform the high CSP as value-increasing activities. Thus, we expect  2 to be positive and

larger for firms with efficient managers than for those with inefficient managers.13

13
We also add the KZ index (Kaplan and Zingales, 1997) as a proxy of financial constraint to a set of control
variables. The KZ index is based on the following five factor model:

25
4. Empirical Results

Descriptive Statistics

Table 1 shows the summary statistics of the variables. The mean value of the ranked

variable of managerial efficiency (ME) is 5.5.14 Also, the table shows that our test variable

corporate social responsibility performance has a mean value close to zero (-0.206) and ranges

from -2.238 to 2.202. Similarly, our other single-category-based CSP measures show similar

characteristics (mean values -0.036 for product-related CSP and 0.021 for environment-related

CSP) with narrower ranges (from -1 to 0.4 for product-related CSP and from -0.454 to 0.714 for

environment-related CSP).

[Insert Table 1 here]

Table 2 shows the correlation coefficients among major variables, and it shows that

managerial efficiency is positively related to CSP, the overall performance measure, but it is

insignificant. Meanwhile, managerial efficiency is positively associated with the product

category performance measure and is statistically significant (at the 5% level). However,

environment-related CSP is negatively associated (at the 1% level). From these correlation

coefficients, we can infer a different effect of managerial efficiency by CSP type. Most notably,

KZ Index = -1.002*Cash flow + 0.283*Q + 3.139*LEV – 39.368*DIV – 1.315*Cash holding,

where Cash flow is the sum of operating income (data item IB) and depreciation (data item DP) scaled by beginning
balance of property, plant, and equipment (data item PPENT); Q is Tobin’s Q measured as the sum of [assets (data
item AT) – book value of common equity (data item CEQ) – deferred tax (data item TXDB) + market value of
equity (data item CSHO * data item PRCC_F)] scaled by book value of common equity (data item CEQ); LEV is
long-term debt ratio measured as the sum of [short-term debt (data item DLTT) + long-term debt (data item DLC)]
scaled by the sum of [short-term debt (data item DLTT) + long-term debt (data item DLC) + stockholders’ equity
(data item SEQ)] (if stockholders’ equity is negative, we set LEV equal to 1); DIV is dividend payment for common
stock and preferred stock shareholders (data item DVP + data item DVC) scaled by beginning balance of property,
plant, and equipment (data item PPENT); Cash holding is measured as cash (data item CH) scaled by beginning
balance of property, plant, and equipment (data item PPENT). Larger (smaller) values of KZ Index correspond to
higher (lower) levels of financial constraints. Untabulated results of this robust test show that our main findings are
not sensitive to the additional variable of financial constraint.
14
The untabulated mean (median) value of a firm’s efficiency from the whole sample from 2003 to 2011 is 0.587
(0.608). The managerial efficiency data are available at Professor Sarah McVay’s website
(http://faculty.washington.edu/smcvay/research.html).

26
the product-related performance measure shows a positive association, while the environment-

related measure shows a negative association.

[Insert Table 2 here]

Regression Results

Table 3 shows the test results of running the ordinary least square (OLS) equation (3) on

three different types of dependent variables: CSP for overall score, PCSP for product-related

CSP score, and ECSP for environment-related CSP score.15

[Insert Table 3 here]

The table shows that when the dependent variable is the overall level of performance

measure (CSP), the coefficient on managerial efficiency (ME) is negative and marginally

significant (-0.049 and significant at the 10% level). However, for other specific CSP variables

(PCSP and ECSP), as suggested in other studies (e.g., Jayachandran et al. 2013), we find a

positive influence of managerial efficiency on the product-related performance measure (PCSP)

(0.032 and significant at the 1% level). On the other hand, for the environment-related

performance measure (ECSP) as the dependent variable, the coefficient on managerial efficiency

(ME) becomes negative (-0.049) and statistically significant at the 1% level, suggesting that

efficient managers are less likely to choose environment-related CSR. Also, overall results

suggest that CSP is driven largely by the environmental component. These findings support the

second part of our first hypothesis (H1b). In particular, these results show that managerial

efficiency boosts product-related CSP (PCSP), but managerial efficiency harms environment-

related CSP (ECSP). We interpret that due to these differential influences of managerial

efficiency on various aspects of the CSP measure, the combined effect of managerial efficiency

15
For the robustness of our tests, we used a ranked score of CSP. Untabulated results show that the results based on
the ranked variable of CSP are consistent with those based on the raw value of CSP.

27
on the overall CSP becomes ambiguous. One possible reason for these inconclusive results is the

regression model specification that uses variables measured at the level CSP model because the

variable rarely changes over the years. We revisit this issue in a later section by adopting a CSP

change model instead of level.

Next, to find the evidence on our hypothesized relationship between firm value and

influence of managerial efficiency on CSR activities to enhance the firm’s value, we use CSP as

the proxy for such activities and tests to compare the cross-sectional difference for different

managerial efficiency levels. Table 4 shows our tests for the three different sets of our proxy for

CSP (CSP, PCSP, and ECSP). We divide the sample into two subgroups (efficient and

inefficient manager groups) using the median value of managerial efficiency. For each group, we

run the regression of firm value (TOTAL_Q) on the CSP measures (CSP, PCSP, and ECSP) for

each group by managerial efficiency.

[Insert Table 4 here]

Column (1) of Table 4 shows the results for the efficient manager group, and the

coefficients on CSP, PCSP, and ECSP are all positive (1.106, 1.648, and 2.792, respectively) and

statistically significant (at the 1% level). The results show that efficient managers can capitalize

the CSP into the firm value captured by Total Q (TOTAL_Q). However, our interest is to

examine differential effects of the degree of managerial efficiency. For the comparison, we run

the same regression on the inefficient manager group. Column (2) of Table 4 shows that the

coefficients on CSP and ECSP are positive (0.670, and 2.911, respectively) and statistically

significant (at the 1% level) but the coefficient on PCSP is negative (-0.127) and statistically

insignificant. These results suggest that overall, even inefficient managers can make CSP

contribute to the firm value but the intermediary role in PCSP is not critical for firm value.

28
 To examine how the performance of efficient managers is different from that of

inefficient managers, we compare the coefficients on the three variables. The statistical

comparison shows that the coefficient on CSP of the efficient manager group (1.106) is larger

than that of the inefficient manager (0.670), and the difference (0.436) is statistically different at

the 1% level (Z-statistic 2.17), which suggests that efficient managers can capitalize overall CSP

into firm value better than inefficient managers.16 Also, we find that the effect of managerial

efficiency is not statistically different for ECSP, whereas the difference in the coefficient of

PCSP is significant at the 1% level (Z-statistic 3.13). These results indicate that managerial

efficiency does not have a moderating role in the environment-related ECSP-CFP relation.

Overall, the results suggest that CSP can better contribute to CFP for firms with efficient

managers but the moderating role of managerial efficiency does not equally apply to all types of

CSP, but is driven by more economic-oriented CSP.17

Alternative Model Testing: Change in CSP

Because firms’ policies on CSR may be sticky over the years, our main analyses based on

level of CSP specification may be influenced by firm-specific unobservable heterogeneity. As a

result, it can be difficult to interpret the presumable causality of managerial efficiency on the

relationship between CSP and corporate financial performance. To assess this possibility, we

16
Following Clogg, Petkova, and Haritou (1995), we use the following Z-statistics to test whether the coefficients
are the same between the two partitioned groups:
( ˆHighME  ˆLowME )
Z ,
s 2 ( ˆHighME )  s 2 ( ˆLowhE )

where ̂ HighME and ̂ LowME are coefficient estimates from the two subsamples and s2   are the squared
standard errors of the coefficients.
17
We conduct additional analysis by using modified Total Q, where the value of R&D expense is added to the
numerator of formula of Total Q because R&D expenditure is not capitalized in accounting. While we lose about 43
percent of the total sample because of blank value or missing value of R&D in Compustat, untabulated results using
the modified Total Q show much stronger results compared to results in Table 4. Considering an external validity of
our findings, however, our main results are based on the original measure of Total Q.

29
adopt the ordered logistic regression model reflecting change in CSP and test the relationship

between change in CSP and managerial efficiency. This alternative model enables us to better

test how the degree of managerial efficiency at the beginning of the year affects CSP and

whether managerial efficiency differentially influences corporate financial performance through

CSP. Therefore, we modify equations (3) and (4) to estimate the changes in the CSP model as

follows:

CSPmeasure it   1   2 ME it 1   3 ROAit   4 SIZE it 1   5 LEV it   6 INSTit

(3-1)
  7 M _ RETit   8 STD _ RETit   it ,

TOTALQ it  1   2 CSPit   3 ROAit   4 SIZE it 1   5 LEVit

(4-1)
  6 INSTit   7 GROWTH it   8 STD _ RETit   2it ,

where CSPmeasure in the ordered logistic regression model (3-1) is defined in three

categories: one, if CSP decreases; two, if CSP does not change; and three, if CSP increases. In

equation (3-1),  1 captures the multiple intercept terms.

Table 5 presents the results of regressions of equations (3-1) and (4-1). We do not report

the intercepts for different outcomes in the ordered logistic models and OLS regression for the

sake of brevity. Panel A of Table 5 shows the results of an ordered logistic regression. As we

anticipated, about 42% of the total sample (4,646 observations) has no change in CSP and 2,445

(3,946) observations reflect an increase (a decrease) in CSP. Panel A shows that the change in

CSP is positively associated with managerial efficiency (coefficient 0.029 and significant at the

1% level). This result suggests that efficient managers increase CSP. In Panel B of Table 5, we

report the results of the effect of change in CSP for two subgroups (efficient and inefficient

manager groups). Two columns in Panel B show the similar, albeit weak, results as in the level

model tests. For both the efficient and inefficient groups, the coefficients on ΔCSP, ΔPCSP, and

ΔECSP are all positive (1.124, 1.865, and 2.058, for the efficient group, and 0.521, 1.611, and

30
2.191 for the inefficient group) and statistically significant (at the 1%~10% level). However, as

we showed in Table 4, there are differences across efficient and inefficient managers. For ΔCSP

and ΔPCSP, the coefficients of the efficient manager group are larger, suggesting that efficient

managers can do a better job of capitalizing the changes in overall CSP (ΔCSP) and the change

in product-related CSP (ΔPCSP) into the firm value. Similar to results in Table 4, while

inefficient mangers do better than efficient managers in the change in the environmental CSP

(ΔECSP), the difference in coefficients is insignificant (Z-statistic -0.12).

[Insert Table 5 here]

Post-hoc probing – moderating role of managerial efficiency

To better understand the moderating role of managerial efficiency, we perform post-hoc

probing of the interaction effect of ME and CSP. As reported in the previous section, we use

subgroup analysis as a main approach to evaluate the interaction effects of managerial efficiency

and CSP. However, the subgroup analysis may not properly show how the effect of CSP on CFP

is moderated by managerial efficiency (ME, efficient manager vs. inefficient manager).

As in Holmbeck (2002), we conduct post-hoc probing analysis in the following manner.

First, we construct two groups (i.e., Group_Low and Group_High) by using the categorized

variable of managerial efficiency. For Group_Low, the values are equivalent for the original ME

variable (0 for inefficient group, 1 for efficient group). For Group_High, the values are -1 for the

inefficient group and 0 for the efficient group. Then, we construct an interaction term to

incorporate these conditional moderator variables: Group_Low*CSP, Group_High*CSP. When

we apply our basic CSP and CFP relation regression for each group variable and interaction term,

we get the following pairs of estimated results for each CSP measure:

All CSP main effect (CSP) subgroups:

31
 Total Q = -0.096 + 0.024 CSP + 0.023 Group_Low – 0.012 CSP*Group_Low
Total Q = 0.107 + 0.011 CSP + 0.023 Group_High – 0.012 CSP*Group_High

Product-related CSP main effect (PCSP) subgroups:

Total Q = -0.096 + 0.008 PCSP + 0.203 Group_Low + 0.037 PCSP*Group_Low

Total Q = 0.107 + 0.045 PCSP + 0.203 Group_High + 0.037 PCSP*Group_High

Environment-related CSP main effect (ECSP) subgroups:

Total Q = -0.096 + 0.027 ECSP + 0.204 Group_Low – 0.057 ECSP*Group_Low

Total Q = 0.108 – 0.029 ECSP + 0.204 Group_High – 0.057 ECSP*Group_High.

As noted, the subgroup estimators are manipulated to generate group-specific equations. The

first regression in each pair estimates the Group_Low (Inefficient, ME=0) specific main equation.

After replacing Group_Low and Group_High value as zeros, the main effect equations will be

summarized as follows:

All CSP main effect (CSP) subgroups

Inefficient Group: Total Q = -0.096 + 0.024 CSP

(t-value=1.74)
Efficient Group: Total Q = 0.107 + 0.011 CSP
(t-value=0.58)

Product-related CSP main effect (PCSP) subgroups

Inefficient Group: Total Q = -0.096 + 0.008 PCSP

(t-value=0.52)
Efficient Group: Total Q = 0.107 + 0.045 PCSP
(t-value=1.97)

Environment-related CSP main effect (ECSP) Subgroups

Inefficient Group: Total Q = -0.096 + 0.027 ECSP

(t-value=1.85)
Efficient Group: Total Q = 0.108 – 0.030 ECSP.
(t-value=-1.93)

Consistent with the results of our main analyses, the results show that the moderating effect of

ME for overall CSP is indistinguishable (0.024 and 0.012, for the inefficient and efficient groups,

32
respectively), while the moderating effect is positive for PCSP (0.009 and 0.046, for the

inefficient and efficient groups, respectively) and statistically significant for the efficient group

at the 5% level. Finally, the moderating effect on ECSP is negative (0.027 and -0.030, for the

inefficient and efficient groups, respectively) and statistically significant at the 10% level.

Overall, the results of the post-hoc probing analysis are generally consistent with our main OLS

regression results but demonstrate the moderating effect of ME on the relation between CSP and

CFP. In Figure 2, we plot the moderating effects of ME for three CSP measures; CSP, PCSP, and

ECSP.

[Insert Figure 2 here]

5. Discussion and Conclusion

The growing importance of CSR and rapidly increasing funds for socially responsible

investment have placed considerable attention on the efficacy of CSR activities in terms of

contributing to firm value. However, numerous efforts to identify the core of the murky

relationship between firms’ CSP and CFP have not provided a clear answer. In this paper, we

revisit the relationship between CSP and CFP by incorporating the role of managerial efficiency.

We propose that the degree of managerial efficiency influences the choices of CSR activities and

then, given a firm’s limited resources, efficient managers choose relatively economic or strategic

CSR, which is expected to create firm value, rather than non-economic CSR. Also, we contend

that more-efficient managers have high competence in executing CSR aligning with the intended

objectives of a firm’s strategic plan, and thus efficient managers are likely to better capitalize

CSP into the firm value.

This study reveals that the discretionary nature of CSR activities helps to enhance (or

impair) corporate financial performance and is linked by the degree of managerial efficiency.

33
Specifically, we find that efficiency works well to add value to the firm with product-related

CSR (we view this as economic/strategic CSR), whereas efficiency does not pay off in

environment-related CSR (we view this as altruistic/ethical CSR). These results suggest that

more-efficient managers are more likely to engage in certain CSR activities that more directly

contribute to corporate financial performance. Ultimately, our findings suggest that managerial

efficiency is a moderator to consider in future studies on the CSP and CFP relation along with

other moderators. Furthermore, we can offer the potential differential effects of this moderator

depending on the types of CSR activities. These results are robust to the several different

specifications of the tests using both regressions (level and change models) and post-hoc probing

analyses.

This study contributes to the literature in several ways. First, we introduce managerial

efficiency in CSR studies for the CSP-CFP relation. This can be an answer to the call for a study

by Waddock and Graves (1997b) that argues certain managerial characteristics could fill the gap

between CSP and CFP. Second, the evidence of differential effects of CSP with the varying

degree of managerial efficiency on CFP suggests that managerial discretion impacts not only the

determination of CSR investment but also the choice of particular types of CSR. By

demonstrating an example of such variation, this study sheds light on CSR literature by showing

the importance of the types of CSR and matched efficiency rule. In other words, we demonstrate

that efficiency rule is not a panacea for all cases of CSR decisions. Thus, managerial efficiency

can play a role of ex ante indicator of value-creating (or value-decreasing) CSP.

Our study is subject to some caveats. First, although several recent studies show the

validity of the measure of managerial efficiency from different angles, measurement errors can

still exist. Furthermore, despite the use of Total Q as the proxy for firm value capturing overall

34
stakeholders’ wealth, other proxies for the financial performance measure or nonfinancial

performance measure should be developed and used in the CSP-CFP relation studies because the

long-term nonfinancial effect of a specific dimension of CSP on corporate financial performance

is not fully captured in the traditional measure of firm value. Also, several control variables

adopted in our study cannot fully control for the effect of macroeconomic factors that may

constrain strategic choices of CSR activities, even among efficient managers. Therefore, our

conclusions should be interpreted with caution. Finally, it is beyond the scope of this study to

identify all the realms of CSR activities and to classify them into the right spectrum of

underlying incentives (e.g., strategic, ethical, or altruistic CSR).

Despite the limitations of this study, our findings can provide insights for future research.

One can study the strength of a tie between the social responsibility committee and the

compensation committee within a board of directors. If there is a strong tie between the two

committees, the firm is more likely to incorporate CSP in management compensation contracts,

resulting in a differential effect on CSP and the relation between CSP and CFP. Also, this study

can be extended into the global setting, allowing for the effects of cultural diversification and

different social values on altruistic CSR because altruistic CSR is advocated to be the social

norm in some countries. In addition, we look forward to studies measuring CSR activities using

actual spending of CSR investment rather than the KLD CSR performance measure as a proxy of

CSP. Such studies can provide more direct evidence on how managers efficiently spend on CSR

and whether the relationship between actual CSR spending and CFP can be varied.

Ethical approval: This article does not contain any studies with human participants or
animals performed by any of the authors.

35
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Appendix A: KLD Rating

KLD STATS is an annual snapshot of CSP rating data with a binary (i.e., 1 or 0) summary of
strength (positive) and concern (negative) ratings of a firm’s CSR. The following are the
qualitative issue areas in KLD data.

KLD Dimension Strengths (1 or 0) Concerns (1 or 0)

Community - Charitable Giving - Investment Controversies
- Innovative Giving - Negative Economic Impact
- Non-US Charitable Giving - Indigenous People Relations
- Support for Education - Tax Disputes
- Support for Housing - Other Concern
- Indigenous Peoples Relations
- Volunteer Programs
- Other Strength
Corporate - Limited Compensation Award - High Compensation
Governance - Ownership Strength - Ownership Concern
- Transparency Strength - Accounting Concern
- Political Accountability Strength - Transparency Concern
- Other Strength - Political Accountability Concern
- Other Concern
Diversity - CEO Diversity - Controversies
- Promotion - Nonrepresentation
- Board of Directors - Other Concern
- Work/Life Benefits
- Women & Minority Contracting
- Employment of Disabled
- Gay & Lesbian Policies
- Other Strength
Employee - Union Relations - Union Relations
Relations - No-Layoff Policy - Health and Safety Concern
- Cash Profit Sharing - Workforce Reductions
- Employee Involvement - Retirement Benefits Concern
- Retirement Benefits Strength - Other Concern
- Health and Safety Strength
- Other Strength
Environment - Beneficial Products and Services - Hazardous Waste
- Pollution Prevention - Regulatory Problems
- Recycling - Ozone-Depleting Chemicals
- Clean Energy - Substantial Emissions
- Communications - Agricultural Chemicals
- PP&E Environmental Maintenance - Other Concern
- Management System
- Other Strength

40
KLD Dimension Strengths (1 or 0) Concerns (1 or 0)
Product - Quality - Product Safety
- R&D / Innovation - Marketing / Contracting Concern
- Benefits to Economically - Antitrust
Disadvantaged - Other Concern
- Other Strength
Human Rights - Positive Record in South Africa - South Africa
- Indigenous Peoples Relations - Northern Ireland
Strength - Burma Concern
- Labor Rights Strength - Mexico Controversies
- Other Strength - Labor Rights Concern
- Indigenous Peoples Relations
Concern
- Other Concern

41
 Strategic CSR Corporate Social
Performance (CSP)

(Product-related CSP & Corporate Financial

Corporate Social Environment-related Performance (CFP)
Responsibility (CSR) CSP)
Total Q
KLD Score
Altruistic CSR

Managerial Efficiency

Figure 1. Conceptual Model

 CSP – Total Q PCSP – Total Q ECSP – Total Q

Figure 2. Graphical Post-hoc Probing: The Role of Managerial Efficiency

This figure presents regression lines for the effect of product-related CSP on CFP moderated by managerial efficiency. The
two partitioned groups are based on samples with high and low managerial efficiency. For detailed procedures to plot the
regression lines, see Jose (2013, https://psychology.victoria.ac.nz/modgraph/).
Table 1. Descriptive Statistics

Variable # of Obs. Mean Std. Dev. Min. Max.

ME 11,037 5.500 2.872 1.000 10.000
CSP 11,037 -0.206 0.399 -2.238 2.202
PCSP 11,037 -0.036 0.136 -1.000 0.400
ECSP 11,037 0.021 0.106 -0.454 0.714
TOTAL_Q 11,037 1.101 0.918 0.001 33.720
SIZE 11,037 6.998 1.561 2.052 13.589
ROA 11,037 0.029 0.128 -0.648 0.271
LEV 11,037 0.472 0.207 0.072 0.950
M_RET 11,037 0.001 0.002 -0.011 0.020
STD_RET 11,037 0.258 0.411 0.006 1.000
INST 11,037 0.578 0.379 0.000 1.000
GROWTH 11,037 0.121 0.294 -0.523 2.179

Variable Definitions:
ME = The decile rank of managerial efficiency from Demerjian et al. (2012) by year and industry (two-
digit SIC code); CSP = corporate social responsibility performance measured by adjusted total strength
score minus adjusted total concern score from seven categories of KLD; PCSP = product-related social
responsibility–adjusted net score from KLD; ECSP = environment-related social responsibility–adjusted
net score from KLD; TOTAL_Q = the market value of equity (Compustat items PRCC_F times CSHO)
plus book value of debt (Compustat items DLTT + DLC) minus current assets (Compustat item ACT)
divided by the sum of the book value of property, plant, and equipment (Compustat item PPEGT) and the
book value of intangible assets (Compustat item ITAN); SIZE = natural logarithm of firm’s total assets of
the previous year; ROA = net income before extraordinary items deflated by total assets of the beginning
of the year; LEV = firm’s leverage measured by long-term debt deflated by total assets of the beginning
of the year; INST = percentage of sum of institutional ownership; M_RET = annual buy-and-hold return
for the fiscal year; STD_RET = standard deviation of daily stock returns for the fiscal year; GROWTH =
sales growth measured by change in sales deflated by lagged sales.
Table 2. Correlation Matrix

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12]
[1] ME
[2] CSP 0.012
[3] PCSP 0.018 0.308

[4] ECSP -0.045 0.542 -0.031

[5] TOTAL_Q 0.084 0.010 0.010 0.003
[6] SIZE 0.027 0.119 -0.334 0.252 -0.054

[7] ROA 0.235 0.063 -0.052 0.064 0.095 0.187

[8] LEV -0.040 -0.017 -0.143 0.053 -0.125 0.431 -0.106

[9] M_RET -0.045 -0.008 0.017 -0.017 0.049 -0.063 0.048 -0.046
[10] STD_RET -0.034 -0.086 0.042 0.137 -0.035 0.057 -0.028 0.086 -0.119
[11] INST 0.061 0.074 -0.034 -0.107 0.025 0.035 0.073 -0.034 0.039 -0.861
[12] GROWTH -0.071 -0.012 0.053 -0.017 0.106 -0.126 0.053 -0.062 -0.035 0.043 -0.070

This table shows the Pearson correlation of key variables used in the analyses. Values in bold indicate correlations that are significant at the 10%
level or better. All variables are defined in Table 1.

45
Table 3. Managerial Efficiency and CSP (test: H1a and H1b)

Variable DEP = CSP DEP = PCSP DEP = ECSP

Intercept 20.851*** -1.339 -21.072***

[4.56] [-0.87] [-17.97]
ME -0.049* 0.032*** -0.049***
[-1.85] [3.64] [-7.41]
ROA 0.049 0.023*** 0.017***
[1.54] [2.83] [2.87]
SIZE 0.041*** -0.031*** 0.019***
[9.87] [-21.94] [18.16]
LEV -0.145*** 0.001 -0.038***
[-6.98] [0.09] [-7.48]
INST -0.044** 0.043*** -0.014***
[-2.22] [6.55] [-3.49]
M_RET -2.271 0.971 -1.784***
[-1.01] [1.53] [-3.83]
STD_RET -0.093*** 0.053*** -0.008*
[-4.60] [7.96] [-1.78]

Industry effects Yes Yes Yes

Year effects Yes Yes Yes
Observations 11,037 11,037 11,037
Adj. R2 (%) 3.20 11.88 11.22

***, **, and * denote two-tailed significance levels of 0.01, 0.05, and 0.10, respectively. The t-statistics reported in brackets are based on
heteroskedasticity-robust standard errors. All analyses are controlled for industry and year fixed effects.

The dependent variable is the CSP variable that indicates the total KLD-adjusted net performance score (CSP), product-related KLD-adjusted net
performance score (PCSP), and environment-related KLD-adjusted net performance score (ECSP). A two-digit SIC dummy is used to control for
industry fixed effects. All variables are defined in Table 1.

46
Table 4. Managerial Efficiency and CSP-CFP Relation (test: H2a and H2b)

Variable HIGH ME(1) LOW ME (2)

Intercept 250.152*** 267.283*** 318.470*** 262.019*** 284.109*** 339.253***

[3.04] [3.22] [3.80] [3.71] [3.98] [4.68]
CSP 1.106*** 0.670***
[7.98] [4.63]
PCSP 1.648*** -0.127***
[3.66] [-0.37]
ECSP 2.792*** 2.911***
[8.32] [6.68]
ROA 5.844*** 6.050*** 5.918*** -4.439*** -4.528*** -4.534***
[6.27] [6.46] [6.33] [-5.30] [-5.38] [-5.43]
SIZE -0.619*** -0.548*** -0.581*** -0.457*** -0.399*** -0.476***
[-10.37] [-9.45] [-9.87] [-8.01] [-7.70] [-8.50]
LEV -6.028*** -5.940*** -5.994*** -3.792*** -3.753*** -3.807***
[-17.07] [-16.78] [-16.97] [-12.86] [-12.68] [-12.88]
INST 0.061 -0.057 -0.039 -0.752** -0.792** -0.740**
[0.17] [-0.16] [-0.11] [-2.12] [-2.22] [-2.08]
GROWTH 3.758*** 3.664*** 3.691*** 2.246*** 2.249*** 2.261***
[8.84] [8.61] [9.71] [7.32] [7.32] [7.37]
STD_RET 0.239 0.054 0.036 -0.767** -0.840 -0.783**
[0.70] [0.16] [0.11] [-2.37] [-2.57]*** [-2.41]
Industry effect Yes Yes Yes Yes Yes Yes
Year effect Yes Yes Yes Yes Yes Yes
Observations 5,518 5,519 5,519 5,519 5,519 5,519
Adj. R2 (%) 14.75 14.17 14.33 11.42 11.09 11.51
Difference in Coefficient
Tests (Z-statistics): Difference in CSP (2.17) Difference in PCSP (3.13) Difference in ECSP (-0.22)

47
Table 4 (Continued)

***, **, and * denote two-tailed significance levels of 0.01, 0.05, and 0.10, respectively. The t-statistics reported in brackets are based on
heteroskedasticity-robust standard errors. All analyses control for industry and year fixed effects. Z-statistics are computed as follows:
( ˆHighME  ˆLowME )
Z ,
s 2 ( ˆHighME )  s 2 ( ˆLowhE )

where ̂ HighME and ̂ LowME are coefficient estimates from the two subsamples and s 2   are the squared standard errors of the coefficients.
The dependent variable is Total Q (TOTAL_Q). The regression analyses are based on weighted adjusted CSR performance metrics and the binary
variable of managerial efficiency. Columns (1) and (2) present the results for two subsamples partitioned on the median value of managerial
efficiency (HIGH ME vs. LOW ME) by using variant measures of corporate social responsibility performance. A two-digit SIC dummy is used to
control industry fixed effects. All variables are defined in Table 1.

48
Table 5. Managerial Efficiency, Change in CSP, and CFP Regressions

Panel A: Ordered Logistic Regression: Managerial Efficiency and CSP

Variable DEP = Ordered CSP

ME 0.029***
[21.41]
ROA -0.535***
[12.15]
SIZE 0.255***
[344.69]
LEV -0.222**
[5.04]
INST 0.158*
[2.71]
M_RET 2.549
[0.06]
STD_RET -0.849***
[91.18]

Industry effects Yes

Year effects Yes
Observations 11,037
Adj. R2 (%) 5.02

49
Table 5 (continued)

Panel B: CSP and CFP Conditioned on Managerial Efficiency

HIGH ME (1) LOW ME (2)

Variable

Intercept 256.481*** 269.803*** 282.656*** 279.652*** 293.918*** 303.375***

[3.10] [3.24] [3.38] [3.93] [4.10] [4.21]
ΔCSP 1.124*** 0.521*
[4.10] [1.87]
ΔPCSP 1.865*** 1.611*
[3.17] [1.88]
ΔECSP 2.058*** 2.191***
[3.21] [2.57]
ROA 5.970*** 6.002*** 5.988*** -4.488*** -4.491*** -4.532***
[6.38] [6.41] [6.39] [-5.36] [-5.37] [-5.42]
SIZE -0.578*** -0.555*** -0.554*** -0.422*** -0.413*** -0.420***
[-9.64] [-9.36] [-9.44] [-7.55] [-7.77] [-7.78]
LEV -6.011*** -5.970*** -5.957*** -3.792*** -3.784*** -3.797***
[-16.93] [-16.80] [-16.85] [-12.78] [-12.74] [-12.78]
INST -0.081 -0.036 -0.048 -0.801** -0.773** -0.772**
[-0.22] [-0.10] [-0.13] [-2.24] [-2.17] [-2.16]
GROWTH 3.744*** 3.702*** 3.681*** 2.260*** 2.247*** 2.246***
[8.80] [8.70] [8.66] [7.34] [7.31] [7.31]
STD_RET 0.056 0.058 0.098 -0.846*** -0.841 -0.786**
[0.17] [0.17] [0.28] [-2.59] [-2.58]*** [-2.40]
Industry effect Yes Yes Yes Yes Yes Yes
Year effects Yes Yes Yes Yes Yes Yes

Observations 5,518 5,519 5,519 5,519 5,519 5,519

Adj. R2 (%) 14.22 14.07 14.04 11.16 11.16 11.18

Difference in Coefficient ΔCSP (1.67) ΔPCSP (0.24) ΔECSP (-0.12 )

Test (Z-statistics)

50
 Table 5 (continued)
**, **, and * denote two-tailed significance levels of 0.01, 0.05, and 0.10, respectively. The t-statistics reported in brackets are based on
heteroskedasticity-robust standard errors. All analyses control for industry and year fixed effects. Z-statistics are computed as follows:
( ˆHighME  ˆLowME )
Z ,
s 2 ( ˆHighME )  s 2 ( ˆLowhE )

where ̂ HighME and ̂ LowME are coefficient estimates from the two subsamples and s 2   are the squared standard errors of the coefficients.
In Panel A, the dependent variable of an ordered logistic regression model is change in CSP (CSP) measured by change in total KLD-adjusted
net score. The variable of CSP can take the following values: 0 (decrease in CSP), 1 (no change in CSP), or 2 (increase in CSP). Panel B reports
the OLS regression results of Total Q on change in CSP using two subsamples partitioned on the median value of managerial efficiency (HIGH
ME vs. LOW ME). A two-digit SIC dummy is used to control for industry fixed effects. All variables are defined in Table 1.

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