University of Groningen An econometric evaluation of the effect of firing a coach on team performance Koning, Ruud H. IMPORTANT NOTE: You are advised to consult the publisher's version (publisher's PDF) if you wish to cite from it. Please check the document version below. Document Version Publisher's PDF, also known as Version of record Publication date: 2003 Link to publication in University of Groningen/UMCG research database Citation for published version (APA): Koning, R. H. (2003). An econometric evaluation of the effect of firing a coach on team performance. s.n. Copyright Other than for strictly personal use, it is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), unless the work is under an open content license (like Creative Commons). The publication may also be distributed here under the terms of Article 25fa of the Dutch Copyright Act, indicated by the “Taverne” license. 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However, data on within-firm dynamics are scarce, and the firing of individual managers is rarely recorded in the firm level data currently available. This makes the value of firing a manager difficult to assess. Data on sports offer a unique opportunity to study this phenomenon because the firing of a coach is usually well-publicized. Using data on soccer, the author evaluates the effect of the firing of a coach on team performance. As teams do not face the same opponents before and after a coach is fired, the issue of sample selectivity is addressed. I. INTRODUCTION II. CHANGING MANAGERS AND COACHES: SOME FINDINGS IN THE Managers are usually held accountable for the perform- LITERATURE ance of the firm for which they work. If the results fall short of expectations, they may be fired or they may get Textbook economic theory would suggest that a firm another perhaps less prestigious position in the same firm. replaces a manager to increase profit (or reduce loss). If For economists it is very difficult to assess whether this this is indeed the case, then profits should increase after a action by the board improves the profitability (or any firing decision. In theory, one could compare profits under other measure of performance) of the firm since these the old manager to profits under the new manager to see if changes in management are not usually observable from performance has improved. However, there are three diffi- standard firm level data. Only changes in top-level manage- culties with this seemingly straightforward approach. ment are announced if the firm is required to do so because The first difficulty is the measurement of performance. In of the ownership structure. In sports, however, data on the theory, profit maximization may be the objective of a firm. performance of teams and on the dismissal of coaches is In practice, however, the performance of a firm is difficult publicly available. to measure, and in fact, different managers in an organ- Using data on soccer, the study examines whether firing ization can pursue different objectives. The intended effect a coach leads to improvement of the performance of the of firing a manager may be different from increasing profit. team. Folklore has it that replacement of a coach leads to a A manager may be fired to appease shareholders or to ‘shock’ effect; this improves the performance of a team. demonstrate that the firm can be ‘tough’ on poor perform- This article is set up as follows. Section II provides a ance. The second difficulty is observing if and when a discussion of related studies. Section III discusses data manager is fired. Firm-level data disclosing the duration and presents some preliminary evidence that indicates of employment of individual employees are difficult to that firing a coach improves performance. However, this find. Firm-level data are usually in such aggregated form preliminary evidence is misleading as it does not account that it is not possible to observe the firing of an individual for differences in the order of play. That is, the old and new manager. coaches do not face the same opponents. Two statistical Even if the performance of a firm can be precisely models that control for this type of sample selectivity are defined and measured and the firing of a manager is fitted later in the article. They reveal that firing a coach in recorded, there remains a third difficulty. The old and the fact does not improve team performance. new manager invariably face different conditions. This Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online # 2003 Taylor & Francis Ltd 555 http://www.tandf.co.uk/journals DOI: 10.1080/0003684022000015946 556 R. H. Koning makes it difficult to assess what part of the change in player is hired and which player is put on the transfer performance is due to the change of manager, and what list. A coach’s responsibilities are to provide training and part is due to the change in the conditions faced by the two guidance to players that translates into more wins and a managers. higher ranking in the league. The issues mentioned above are addressed only partially There a number of reasons why a coach may be fired. in the literature on changes in performance and its relation- The reason cited most often is the existence of a ‘shock’ ship to changes in management. There exist in fact two effect: the new coach is able to motivate the players better, streams of the literature to which this article is related: and therefore is able to improve results. Coaches work one in finance and the other in the statistical analysis of under high media and fan pressure. If results fall short of sport outcomes. Most of the studies in the finance literature expectations, or if the quality of the play does not live up to on managerial change and performance focus on the expectations, pressure may mount to fire the coach. The reverse question: what are the factors that lead to a change general public is willing to pay to see winners, less so to see in management? For example, in a study on the relation losers. Moreover, it is important for teams to be successful, between a firm’s stock return and subsequent management because transfers of players from successful teams to other changes, Warner et al. (1988) found that a firm’s share teams are more valuable, and hence the return on invest- performance and the probability of a management change ments into these players is higher. are negatively related. They also examine whether the The effect of changing a coach has been studied before, announcement of a management change results in any see for instance Van Dalen (1994), Scully (1995) and Brown abnormal stock returns, but find little evidence of this (1982). Van Dalen’s study discussed whether firing the effect. While Warner et al. (1988) examined the effect of coach of a soccer team improves performance. He esti- the announcement of a new manager, they do not examine mated a model in which the dependent variable is the dif- whether the performance of stock returns actually improve ference between the goals scored by the two teams that play under the new manager. each other in a particular game. The independent variables The latter issue is addressed in studies by Denis and are a measure of the quality of the referee, a measure that Denis (1995) and more recently by Khurana and Nohria captures the difference in team quality, a dummy variable (2000). Using the ratio of operating income before depre- indicating a home game, the result of the previous game ciation to operating assets as the measure of performance, and a trend. He estimated this model for each team in the Denis and Denis found ‘that forced resignations of top competition, and he extended the model with a dummy managers are preceded by large and significant declines in variable that indicates that the new coach has taken over. operating performance and followed by large improve- Using data for the 1993/94 season only, he found that all ments in performance’. They conclude that there are valu- coach changes have a positive effect on the goal difference, able operating improvements associated with forced and the effect is significantly positive in three of the five resignations. Khurana and Nohria used a similar measure cases. of firm performance to assess whether forced management Van Dalen’s study has two drawbacks. The most import- turnover leads to improvements of performance. They pro- ant drawback is that the model used for the goal difference pose a model in which the departure of the existing man- depends on the ranking of both teams at the moment the ager and the origin of the incoming manager are analysed game is played.