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CEO Ability and Corporate Social Responsibility

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Abstract

This study examines the impact of chief executive officer (CEO) ability on firms’ corporate social responsibility (CSR) performance. We find that firms’ CSR performance increases with CEO ability. Specifically, firms with more able CEOs are associated with more socially responsible activities and fewer socially irresponsible activities, and are associated with more stakeholder CSR rather than third-party CSR. We further find that the positive relation between CEO ability and CSR is weakened for CEO who is also the chair of the board and for CEO who is close to retirement; and is weakened when the CSR emphasis exerted by a firm’s external environment is high. Our results are robust after controlling for firm fixed effects and to the use of multiple measures of CSR performance and CEO ability. Overall, our evidence is consistent with our conjecture that more able CEOs have less career concerns so that these CEOs are more willing to undertake long-term investments in socially beneficial activities, leading to better CSR performance.

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Notes

  1. See 2014 Report on Sustainable and Responsible Investing Trends in the United States. http://www.ussif.org/trends.

  2. The measure of CEO ability that we use differs slightly from that of Demerjian et al. (2012). See details in “Research Method” section.

  3. MSCI STATS is the successor to Kinder, Lydenberg and Domini (KLD), Innovest, and IRRC. MSCI STATS categorizes CSR items as qualitative issues or controversial business issues.

  4. The untabulated test shows that our results are robust to the inclusion of corporate governance dimension in calculating CSR scores. Some studies (e.g., Choi and Wang 2009; Tang et al. 2015) exclude human rights issues from their CSR calculations. Our results are also robust to the exclusion of human rights dimension in calculating CSR scores.

  5. Demerjian et al. (2012)’s managerial ability is widely used in the literature. This includes Andreou et al. (2016), Bonsall IV et al. (2016), Chen et al. (2015), Jiraporn et al. (2016), Koester et al. (2016) and Krishnan and Wang (2014).

  6. Following Demerjian et al. (2012), we estimate Model (1) by Fama and French (1997) industry for our sample period from 2003 to 2012. Untabulated results show that, except for the CSR SCORE variable, our estimations are qualitatively similar to those of Demerjian et al. (2012). As part of our robustness check, we also exclude CSR SCORE in Model (1) and obtain qualitatively similar results for our main tests.

  7. Besides these control variables, we included the Kaplan–Zingales index (Hong et al. 2012), slack (Tang et al. 2015), firm age, advertising expenses, and CEO’s compensation in the main regressions. The results (untabulated) are qualitatively unchanged.

  8. When we measure MABILITY as a continuous variable, we find qualitatively similar results.

  9. Prior studies suggest that CEOs typically retire between the ages of 64 and 66 (Murphy 1999) and often use the years preceding a CEO’s retirement as a proxy for horizon problems (Dechow and Sloan 1991; Murphy and Zimmerman 1993).

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Acknowledgements

We thank R. Edward Freeman (the editor), Michelle Greenwood (the editor), and anonymous referees. We also thank Gary Monroe, Greg Shailer and the workshop participants at Xi’an Jiaotong University and the AAA 2016 Annual Meeting for helpful comments. Gaoliang Tian acknowledges financial support for this project from National Natural Science Foundation of China (71372163) and Special Scientific Research Plan of Education Department of Shaanxi Provincial Government of China (16JK2056).

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Correspondence to Yuan Yuan.

Appendix: Variable Definitions

Appendix: Variable Definitions

Dependent variables

CSR STRENGTHS

The sum of strengths scores across the six KLD issue areas included in this study

CSR CONCERNS

The sum of concerns scores across the six KLD issue areas included in this study

CSR SCORE

The total CSR score, calculated as CSR STRENGTHS minus CSR CONCERNS

Third Party CSR STRENGTHS

The sum of all strengths scores across the following three KLD issue areas: community, the environment, and human rights

Third Party CSR CONCERNS

The sum of all concerns scores across the following three KLD issue areas: community, the environment, and human rights

Third Party CSR SCORE

The total third-party CSR score, calculated as Third Party CSR STRENGTHS minus Third Party CSR CONCERNS

Stakeholder CSR STRENGTHS

The sum of all strengths scores across the following three KLD issue areas: diversity, product quality and safety, and employee relations

Stakeholder CSR CONCERNS

The sum of all concerns scores across the following three KLD issue areas: diversity, product quality and safety, and employee relations

Stakeholder CSR SCORE

The total stakeholder CSR score, calculated as Stakeholder CSR STRENGTHS minus Stakeholder CSR CONCERNS

Adjusted CSR SCORE

The adjusted CSR score developed by Deng et al. (2013), calculated as CSR SCORE divided by the number of strengths and concerns items the same year

Independent variable

MABILITY

The decile rank (by year and industry) of the managerial ability score without CSR effect, which is calculated by Model (1)

Adjusted ROA

The 5-year (from year t − 5 to year t − 1) industry-adjusted ROA. The industry-adjusted ROA for each year is calculated as income before extraordinary items (IBC) scaled by average total assets (AT), minus the average ROA for firms with the same two-digit SIC industry

Other control variables

SIZE

The natural log of total assets (AT), measured at the end of fiscal year t

LEVERAGE

The sum of long-term debt and debt in current liabilities divided by total assets ((DLTT + DLC)/AT), measured at the end of fiscal year t

ROA

Income before extraordinary items divided by total assets (IB/AT), measured at the end of fiscal year t

MB

The market value of equity divided by the book value of equity ((PRCC_F × CSHO)/CEQ), measured at the end of fiscal year t

RD

R&D expenses scaled by total assets (XRD/AT), measured at the end of fiscal year t

CFO

Cash flow from operations divided by total assets (OANCF/AT), measured at the end of fiscal year t

DIV

Cash dividends scaled by total assets ((DVC + DVP)/AT), measured at the end of fiscal year t

HHI

The sum of the squared market shares of all firms in the same two-digit SIC code, measured at the end of fiscal year t

BLUE

Dummy variable equal to one if a firm’s headquarters are in a US blue or Democratic state and zero otherwise. The list of blue states is obtained from the following Web sites: http://en.wikipedia.org/wiki/File:Red_state,_blue_state.svg and http://thehill.com/blogs/ballot-box/house-races/221721-how-red-or-blue-is-your-state, where define a blue state if it is listed in both Web sites

LITIGATION

Dummy variable equal to one if a firm operates in a high-litigation industry (SIC codes 2833–2836, 3570–3577, 3600–3674, 5200–5961, 7370–7374, 8731–8734) and zero otherwise

CHAIR

Dummy variable equal to one if a CEO is also the chair of the board of directors and zero otherwise

FEMALE

Dummy variable equal to one if a CEO is female and zero otherwise

TENURE

The number of years since a CEO has occupied the CEO position

CEO_RETIRE

Dummy variable equal to one if a CEO’s age is at least sixty-three years and zero otherwise

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Yuan, Y., Tian, G., Lu, L. et al. CEO Ability and Corporate Social Responsibility. J Bus Ethics 157, 391–411 (2019). https://doi.org/10.1007/s10551-017-3622-3

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  • DOI: https://doi.org/10.1007/s10551-017-3622-3

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