The purpose of this dissertation is to analyze how managerial discretion is influenced by the environment and, thereby, increase the theoretical knowledge of the concept. Hambrick and Finkelstein (1987) introduced environment as a level affecting managerial discretion. However, the authors only discussed it in an industry context. Moreover, in this dissertation we developed the environmental level by adding two more contexts. Thereby, a theoretical input –and output model were created. These include three environmental sublevels: Industry characteristics, public sector and transition economy. The analysis is under a strategic perspective, which defines top managers’ discretion as the latitude of strategic actions. Hence, managerial discretion varies in the scope of available actions influenced by environmental factors. To fulfill the purpose of this dissertation, the methodical approach is a case-study. Thus, the data consists of interviews, observations and public documents collected in a governmental organization. The findings have shown that a dynamic environment, such as a country undergoing a transition, provides context-specific factors affecting the degree of managerial discretion. Context-specific factors, such as powerful outside forces and quasi-legal constraints can increase and/or decrease the degree of top managers’ degree of discretion. The conclusion summarizesthe findings of how the different factors within each sublevel, affect the degree of managerial discretion. Moreover, the conclusion also contains the contributions of this dissertation. Firstly, the study contributes to the theory of managerial discretion, by introducing context specific factors within the public sector and a transition economy. Secondly, the study enhances the empirical knowledge about the concept, by providing new empirical evidence of managerial discretion. Finally, the results of this dissertation can help policy makers as guidelines when implementing policies. Recommendations for future research include adding the governance perspective, and/or conducting a comparison research with different organizations/contexts.