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This study investigates the impact of market conditions, specifically periods of macroeconomic stress, on the association between managerial ability and firm profitability. Drawing on cognitive relational theory, we predict that economic stress positively moderates this relationship. Across multiple measures of economic stress and managerial ability, we find consistent results in favor of our prediction: controlling for the main effect of managerial ability, the extent to which higher ability managers increase firm accounting profitability is amplified during times of macroeconomic stress. Further analyses suggest that the moderating role of economic stress on the ability-performance relationship is most salient in strongly pro-cyclical industries, also consistent with cognitive relational theory. We additionally find higher ability management is able to generate stronger performance during times of economic stress more readily in firms employing defender strategies.
Barry R Hettler, Ohio University
James Cordeiro, SUNY Brockport
Arno Forst, University of Texas Rio Grande Valley