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http://ssrn.com/abstract=1266974
 
 

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Quantifying Managerial Ability: A New Measure and Validity Tests


Peter R. Demerjian


University of Washington - Michael G. Foster School of Business

Baruch Lev


New York University - Stern School of Business

Sarah E. McVay


University of Washington

October 31, 2011

Management Science, Forthcoming
AAA 2009 Financial Accounting and Reporting Section (FARS) Paper
AAA 2009 Management Accounting Section (MAS) Meeting Paper

Abstract:     
In this paper we propose a measure of managerial ability, based on managers’ efficiency in generating revenues, which is available for a large sample of firms and outperforms existing ability measures. We find that our measure is strongly associated with manager fixed effects, and that the stock price reactions to CEO turnovers are positive (negative) when we assess the outgoing CEO as low (high) ability. We also find that replacing CEOs with more (less) able CEOs is associated with improvements (declines) in subsequent firm performance. We conclude with a demonstration of the potential of the measure. We find that the negative relation between equity financing and future abnormal returns documented in prior research is mitigated by managerial ability, as more able managers appear to utilize equity issuance proceeds more effectively, illustrating that our more precise measure of managerial ability will allow researchers to pursue studies that were previously difficult to conduct.

Number of Pages in PDF File: 33

Keywords: Managerial ability, data envelopment analysis

JEL Classification: G30, G34, J44

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Date posted: September 11, 2008 ; Last revised: November 13, 2011

Suggested Citation

Demerjian, Peter R. and Lev, Baruch and McVay, Sarah E., Quantifying Managerial Ability: A New Measure and Validity Tests (October 31, 2011). Management Science, Forthcoming; AAA 2009 Financial Accounting and Reporting Section (FARS) Paper; AAA 2009 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: http://ssrn.com/abstract=1266974 or http://dx.doi.org/10.2139/ssrn.1266974

Contact Information

Peter R. Demerjian (Contact Author)
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195-3200
United States
Baruch Itamar Lev
New York University - Stern School of Business ( email )
40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)
HOME PAGE: http://www.baruch-lev.com
Sarah E. McVay
University of Washington ( email )
Box 353200
Seattle, WA 98195-3200
United States
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