Quantifying Managerial Ability: A New Measure and Validity Tests

Management Science, Forthcoming

AAA 2009 Financial Accounting and Reporting Section (FARS) Paper

AAA 2009 Management Accounting Section (MAS) Meeting Paper

33 Pages Posted: 11 Sep 2008 Last revised: 13 Nov 2011

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 31, 2011

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.

Keywords: Managerial ability, data envelopment analysis

JEL Classification: G30, G34, J44

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: https://ssrn.com/abstract=1266974 or http://dx.doi.org/10.2139/ssrn.1266974

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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