Measuring Managerial Ability Using a Two-stage SFA-DEA Approach

The article focuses on the measurement of a relevant component of the human capital, the managerial ability (MA). Quantifying MA is central to management literature. Prior research indicates that manager specific features (ability, talent, reputation, or style) affect economic outcomes but, in management literature, most of the measures used in archival research also reflect significant aspects of the firm that are outside of management’s control. The article aims to find a measure, better than existing ones, which allows distinguishing the effect of the manager from the effect of the firm in creating firm value. The article uses the “two-stage SFA-DEA” approach, in which both Stochastic Frontier Approach (SFA) and Data Envelopment Analysis (DEA) are used to estimate the efficiency scores firms adopt to derive a measure of MA. The idea is to obtain a measure of MA as a residue of the inefficiency equation of SFA and to use it as a new input to insert in the “second/third” DEA stage. Italian banks have been chosen as the sample to investigate and implement the model. The differences in results with or without this new MA measure provide evidence of the existence of this contribution. The originality of the article consists in the proposition of a new model to measure MA, which outperforms the alternative measures, simple to use as it is based on easily obtainable financial data and available for a broad cross section of firms, so opening the door to a wide array of studies previously difficult to conduct.