MEASUREMENT AND EVALUATION OF MANAGERIAL EFFICIENCY IN ENGLISH LEAGUE FOOTBALL: A STOCHASTIC FRONTIER ANALYSIS being a thesis submitted for the Degree of Doctor of Philosophy in the University of Hull by Peter Michael Dawson B.Sc. (Bradford) February 2000 The secret of being a good manager is to keep the five players who hate you from the half-dozen who are undecided. Jock Stein (King and Kelly, 1997) Coaching is for kids. If a player can't trap a ball and pass it by the time he's in the team, he shouldn't be there in the first place. At Derby, I told Roy McFarland to go and get his bloody hair cut; that's coaching at top level. Brian Clough (King and Kelly, 1997) No coach can guarantee results, you can only guarantee a way of playing. Results are in the hands of fate. It is ridiculous to pin the etiquette of success or failure on a coach just because a coin comes up heads or tails. Jorge Valdano (King and Kelly, 1997) CONTENTS Page No. List of Tables Vlll List of Figures xi Acknowledgements xu Introduction 1 Chapter 1 Managerial Performance: Incentives and Human Capital 1.1 Introduction 6 1.2 The Purpose and Role of the Manager 8 1.3 Theory of Agents 12 1.3.1 The Hidden Action Model 14 1.4 Testing the Relationship Between Incentives and Effort 22 1.4.1 Pay-Performance 22 1.4.2 Incentives Through Monitoring 30 1.5 Efficiency Wages 35 1.6 Measuring Ex Post Effort: "Do Incentives Matter?" 38 1.7 Managerial Quality, Selection and Performance 41 1.7.1 Human Capital Theory 41 1.7.2 Hidden Information and Managerial Sorting 46 1.8 Measuring Managerial Performance 50 1.8.1 Subjective Measures of Managerial Performance 50 1.8.2 Objective Measures of Managerial Performance 54 1.9 Summary 57 iii Contents Page No. Chapter 2 Production Frontiers: Techniques and Applications 2.1 Introduction 59 2.2 Production Functions and Production Frontiers 60 2.3 Estimation Methods 64 2.3.1 Deterministic Frontiers 65 2.3.2 Stochastic Frontiers: Cross-Section Data 66 2.3.3 Stochastic Frontiers: Panel Data 72 2.4 Inefficiency Effects: Models and Applications 83 2.5 Sporting Production Functions and Production Frontiers 88 2.6 Summary 96 Chapter 3 English Professional Football: Clubs, Players and Managers 3.1 Introduction 98 3.2 Organisational Structure: Industry Level 103 3.3 Organisational Structure: Club Level 109 3.4 Labour Inputs 115 3.4.1 Playing Resources 116 3.4.2 Managerial Resources 124 3.5 Summary 129 iv Contents Page No. Chapter 4 Modelling Football Production and Managerial Efficiency 4.1 Introduction 131 4.2 Modelling Team Production in Football 133 4.2.1 Measuring the Quality of the Playing Inputs 134 4.2.2 Individual Performance Data 136 4.2.3 Wage Data 137 4.2.4 Individual Player Transfer Valuations 141 4.3 Measuring Managerial Efficiency 145 4.4 Modelling Managerial Efficiency 151 4.5 Summary 162 Chapter 5 Data and Methodology 5.1 Introduction 164 5.2 Data Sources 165 5.3 Estimation Procedure 166 5.3.1 Estimating Player Quality 166 5.3.2 Estimating Team Quality 170 5.3.3 Estimating Managerial Performance 171 5.4 Summary 183 v Contents Page No. Chapter 6 Empirical Results I: Specification and Estimation of Managerial Efficiency 6.1 Introduction 185 6.2 Model Specifications 187 6.2.1 Estimation Procedure 188 6.2.2 Input and Output Measures 197 6.3 Results 200 6.3.1 Time-Invariant Managerial Efficiency 203 6.3.2 Time-Varying Managerial Efficiency 209 6.3.3 Comparing Alternative Input and Output Specifications 217 6.4 Summary 227 Chapter 7 Empirical Results II: Investigating the Sources of Managerial Efficiency 7.1 Introduction 229- 7.2 Model Specification 232 7.3 Managerial and Club Characteristics 233 7.4 Results 245 7.5 Does the Manager Make a Difference? 258 7.6 Summary 267 Chapter 8 Conclusions 270 vi Contents Page No. Appendix I Predicting Individual Player Valuations: How Accurate is the Soccer Transfers Model? 276 Appendix n Managerial Efficiency Scores 285 Data Appendix 298 References 311 vii LIST OF TABLES Page No. Table 3.1 Turnover and Profitability in English Professional Football, 1992/93 to 1996/97 (£,000) 107 Table 3.2 Ownership Structure of Premier League Clubs and other Listed Football Clubs 113 Table 3.3 Net Transfer Fees Received (paid) by the "Average Club" by Division (£,000) 119 Table 3.4 Wage Expenditure for "Average Club" by Division (£,000) 122 Table 3.5 Age Distribution ofIndustrial and Football Managers (per Cent) 127 Table 3.6 Number of Managerial Terminations and Timing of Terminations, 1992/93 to 1997/98 128 Table 3.7 Managerial Termination by Division, 1992/93 to 1997/98 128 Table 5.1 Player Characteristics 168 Table 5.2 Predicted Player Valuations: Models Considered 169 Table 5.3 Predicted Player Valuations: Correlation Matrix 169 Table 5.4 A Comparison of Alternative Aggregation Methods (All Divisions, Season 1996/97) 171 Table 5.5 Manager Sample Sizes by Division and by Season 174 Table 5.6 Output File, AL978.0UT 180 Table 6.1 Descriptive Statistics: Team Performance Variables 201 Table 6.2 OLS, Within, GLS and ML Estimates of a Stochastic Team Production Frontier for Premier League Teams (Time-Invariant Managerial Efficiency) 204 viii List of Tables Page No. Table 6.3 Time-Invariant Models: Summary Statistics of Managerial Efficiency Scores 207 Table 6.4 ML Estimates for Time-Varying Efficiency and Inefficiency Effects Models (premier League Teams) 212 Table 6.5 Generalised - Likelihood Ratio Tests for the Distribution of Managerial Efficiency: BC (1992), BCl (1995), BC2 (1995) 213 Table 6.6 Time-Varying Models: Summary Statistics of Managerial Efficiency Scores 215 Table 6.7 ML Estimates of a Stochastic Team Production Frontier: A Comparison of Various Input / Output Specifications (All Teams) 218 Table 6.8 Generalised-Likelihood Ratio Tests for the Distribution of Managerial Inefficiency Effects: Various Input / Output Specifications 222 Table 6.9 Various Input / Output Specifications: Summary Statistics of Managerial Efficiency Scores 223 Table 7.1 Managerial and Club Characteristics 235 Table 7.2 Descriptive Statistics: Managerial Inefficiency Effects 242 Table 7.3 Managerial Inefficiency Effects by Model Specification: Human Capital Measures 246 Table 7.4 Inefficiency Effects: Playing Career, Managerial Experience and Club-Specific Effects 249 Table 7.5 Managerial Inefficiency Effects by Division (MODEL 4) 254 Table 7.6 Mean Efficiency of Football Managers 260 ix List of Tables Page No. Table 7.7 Mean Efficiency by Team 263 Table ALI A Comparison of Permanent Transfers Involving a Fee with Predicted Transfer Valuations (July 1996) 277 Table Al.2 Manchester United's Championship Winning Side 1993: Predicted Player Valuations over Time 279 Table Al.3 Predicted Player Valuations by Division ("Average" Player) 280 Table AlA Predicted Valuations for Premier League Players by Positions ("Average" Player) 281 Table A1.5 Top 50 Valuations,1992/93 to 1997/98 282 x LIST OF FIGURES Page No. Figure 2.1 A Production Frontier: Measuring Efficiency 63 Figure 2.2 Estimating Efficiency: COLS versus ML 70 Figure 3.1 Structure of a Typical Football Club no Figure 4.1 Wage and Employment Determination in Professional Football 139 Figure4.2 Managerial Effort, Ability and Performance 160 Figure4.3 Managerial Effort and Ability over Career Life Cycle 161 Figure 6.1 Mean Managerial Efficiency over Time: BC (1992), BC1 (1995) and BC2 (1995) 216 Figure 6.2 Mean Managerial Efficiency over Time: Various Input / Output Specifications 225 Figure 6.3 Mean Managerial Efficiency by Division: Various Input / Output Specifications 226 Figure 7.1{a) Managerial Efficiency over Time: Managers of One Club 256 Figure 7.1(b) Managerial Efficiency over Time: Managers of Two Clubs 256 Figure 7.I(c) Managerial Efficiency over Time: Managers of Three Clubs 257 Figure 7.I(d) Managerial Efficiency over Time: Managers of Four Clubs 257 Figure AI.I Age-Predicted Value Profile for Premier League Players (1997/98) 284 xi ACKNOWLEDGEMENTS There are many people I would like to thank for help and assistance throughout the last three and a half years. I am especially grateful to my supervisor, Dr Stephen Dobson, who brought to my attention the study of managerial efficiency and who read the whole thesis (at various stages of completion) in the most painstaking manner. His continued encouragement, suggestions and guidance have been invaluable. He also kindly allowed access to his treasured collection ofRothmans Football Yearbooks. I would also like to extend thanks to Dr Bill Gerrard for supplying the player valuations and for numerous responses to specific queries about the SOCCER TRANSFERS program; to John Goddard for many helpful comments and insights on earlier drafts; to Deloitte and Touche for providing me with financial data; and to Dr Tim Coelli for technical assistance with the computer program FRONTIER 4.1. Needless to say, responsibility for any mistakes or omissions are mine alone. A big thank you also goes to my family, in particular my parents Malcolm and Patricia Dawson who instilled in me the value of hard work and perseverance and my parents-in-law, Brenda and Ron for support and continual understanding. I am also indebted to friends, too numerous to mention, for terrific support even though some can scarcely believe economics and football can be combined, and to colleagues at the University of Hull who frequently had to endure lengthy discussions about the virtues of football data. xii The greatest thanks must, however, go to my wife Elaine for her unfailing love and support and for maintaining mine, as well as her own, sanity throughout the highs and lows.