Attempting an Empirically Robust Measurement of Managerial Ability: The Case of Indian Firms

Abstract

A Managerial Ability (MA) Score for Indian firms is estimated using publicly-available accounting data. Firm efficiency, and later managerial ability, is estimated following alternative methodologies, and results compared. A two-step estimation process computes managerial ability: calculating firm efficiency using Data Envelopment Analysis (DEA); followed by a regression analysis which segregates managerial ability from firm-specific contextual factors, such that residual component represents managerial ability. As a result of combining a Slacks-Based DEA-model with a Fractional Regression Model (FRM), the study determines the most robust measurement of managerial ability. Variations in managerial ability across industries is observed.

Keywords: managerial ability, Firm Efficiency, Indian firms, Data Envelopment Analysis