Proving their mettle: Managerial ability and firm performance in trying times

Abstract

This study investigates the impact of trying economic times, i.e., periods of economic decline and uncertainty, on managerial ability. We find that trying economic times positively moderate the association between managerial ability and firm profitability. Consistent with these primary findings, we also find that the positive moderating role of economic decline and uncertainty on the ability-performance relationship is most salient in procyclical industries. Our results are robust across multiple measures of economically trying times and managerial ability. Further analyses indicate that in trying times more capable managers generate stronger performance through both improved asset turnover and profit margins.