The impact of managerial discretion on corporate social responsibility and firm performance

Managerial discretion, although an important element of strategic decision-making in corporate social responsibility (CSR), has not yet received due attention from researchers. Prior studies have focused on the impact of overall CSR spending on firm performance, showing mixed results. This study can be considered unique as it analyses total and sector-specific CSR expenditures undertaken by firms. Using panel data analysis, we examine the role of managerial discretion in strategic CSR decisions and their impact on firm performance. Building on extant literature, we hypothesize that managerial discretion, demonstrated in spending beyond the legally mandated CSR budget and sector-specific CSR decisions, will positively impact firm value (Tobin’s Q) and free cash flow. Our analysis of five years of data on 340 large listed firms confirms these hypotheses, showing a positive impact of managerial discretion on both firm value and free cash flow. Also, from a governance perspective, board independence influences free cash flow. While previous studies have suggested mixed or limited effects of CSR on firm performance, our findings suggest that managerial discretion significantly enhances firm performance through strategic CSR decisions. To our knowledge, this is the first attempt to investigate the specific effects of managerial discretion on firm performance.