Does a CEO's National Culture Affect Corporate Social Responsibility and Financial Performance of a Firm?

Abstract

An established stream of the research shows that managerial characteristics affect the overall functioning of a firm. This assertion is based on the upper echelons theory. Scholars mutually agree that the chief executive officer’s (CEO) characteristics determine the firm’s policies, for example, corporate social responsibility (CSR). One such characteristic is the CEO’s cultural background. Despite the increasing importance of CEOs' cultural background, studies exploring the relationship of the CEOs’ cultural background with CSR and financial performance are virtually non-existent. This study aims to fill this research gap by exploring the impact of the CEOs’ cultural background on CSR and financial performance. This study employs an extensive data set of United States’ companies—from 1996 to 2015 with 12,218 observations—to provide the first-ever evidence on the effect of CEOs' cultural background on CSR and financial performance. In this study, 1,787 firms listed on Standard & Poor’s 1500 are included in the analysis. This study has unbalanced panel data. To examine the impact of a CEO’s cultural background on CSR and financial performance, this study has employed pooled cross-sectional time-series regression with robust standard errors clustered at the firm level. The findings of this study suggest that those CEOs who belong to individualistic and masculine cultures have a higher propensity to undertake CSR initiatives. More importantly, they indulge more in community and environment-related activities. It is also observed that CEOs who belong to masculine cultures are more likely to undertake corporate governance-related activities. Different cultural dimensions affect firm financial performance differently. For example, those CEOs who belong to a society where power is unequally distributed negatively affect Return on Assets (ROA) and Market to Book ratio (MTB).