Exploring the relationship between managerial ability and ESG performance: a stochastic data envelopment analysis approach

Abstract In this paper, we employ stochastic data envelopment analysis (SDEA) to render managerial ability that is comprised of seven inputs and one output proposed by Demerjian et al. (Manag Sci, 58(7):1229-1248, 2012). A random effects panel data analysis (PDA) model is used to explore the relationship between managerial ability and environmental, social, and governance (ESG) performance based on longitudinal data. Our results show that there is a significant positive link between managerial ability and ESG performance in the energy industry, and there are significant positive associations between managerial ability and all three aspects of ESG. Our findings further suggest that the higher the managerial ability derived from the managerial efficiency theory proposed by Demerjian et al. (Manag Sci, 58(7):1229-1248, 2012) of a firm’s executives, the better the ESG performance of the firm, which underlines managerial ability as a major enabler of the firm’s ESG capabilities and performance.