Universal Journal of Management 7(1): 31-38, 2019 http://www.hrpub.org DOI: 10.13189/ujm.2019.070104 Player and Organization Performance: A Study of First-time Major League Baseball Free Agents Jeff Barrows*, William Seyfried1 1Crummer Graduate School of Business, Winter Park, Florida, United States Copyright©2019 by authors, all rights reserved. Authors agree that this article remains permanently open access under the terms of the Creative Commons Attribution License 4.0 International License Abstract Since Major League Baseball instituted free the league’s 30 organizations. Free agency is lucrative for agency in 1976, scholars have observed notable increases players as long-term, multi-million dollar contracts have and decreases in player performance around their eligibility become the norm. Conversely, organizations accept risk to negotiate as free agents. Beginning with a sample of 305 when signing a player to a free-agent contract since the position players (non-pitchers), this study uses two financial terms and duration are guaranteed, regardless of competing theories of human behavior to explain such player performance. Since the inception of free agency in changes in player performance between their contract year 1976, scholars have documented significant changes in (year before becoming eligible for free agency) and free- player performance prior to, and after signing a free-agent agent year (year after signing a free-agent contract) and contract (for example, see Duchon & Jago [1]; Ahlstrom et explores the impact of player performance on organization al.[2]; and Estes[3]). These scholars contended that revenue in the free-agent year. Based on a comparison of changes in player performance (both positive and negative) actual and estimated performance in the contract year, 51 were related to the player’s opportunity to bargain as free players who underperformed were found to have improved agents. This research assesses the potential impact of free performance in their free-agent year and their contributions agency on player performance and the impact of player to organization revenue exceeded their salary. In contrast, performance on organization performance (revenue) as a 50 players who overperformed in their contract year result of the player’s contributions to team performance experienced reduced performance in their free-agent year (winning percentage) in the year after signing his first free- and their salary exceeded their contributions to agent contract. organization revenue. Keywords Major League Baseball, Free Agency, 1.1 . Theoretical Basis for the Study Equity Theory, Expectancy Theory, Marginal Revenue The existing academic literature dedicated to MLB free Product agency has consistently used equity theory and expectancy theory to explain variations in player performance in the year prior to, and the year after signing a free-agent contract. In this study, a broader theoretical perspective offers a new 1. Introduction approach in framing the equity theory/expectancy theory debate. “Every free-agent contract in baseball is a gamble.” This MLB team presidents and general managers are was the opening sentence in Washington Post sports writer responsible to their ownership groups to assemble a roster Dave Sheinin’s July 14, 2017 column as he reflected on the of players to form a winning team. Assembling a roster of Boston Red Sox signing of Pablo Sandoval, who became a players may be considered in light of modern portfolio first-time Major League Baseball (MLB) free agent after theory (Lampe [4]). While Markowitz [5] envisioned his the 2014 season. Sheinin characterized the transaction—a theory in the context of financial markets, his theory offers five-year, $95M contract—as a mistake as the Red Sox guidance on player selection. Markowitz [5] suggested the released Sandoval after two-and-a-half seasons of poor and process of selecting a portfolio should be considered in two limited performance. Further exacerbating the situation, the stages. The first stage starts with observation and day the Red Sox sent Sandoval packing, they also assumed experience and ends with beliefs about the future responsibility for the balance of his free-agent deal—a performance. The second stage starts with beliefs about $49M bill. MLB players reach a point in their careers future performance and ends with the choice of portfolio. when they can negotiate their services freely with any of Complicating an organization’s decision to sign a free 32 Player and Organization Performance: A Study of First-time Major League Baseball Free Agents agent is the fact this opportunity for significant player Expectancy theory is one of the most popular theories of wealth typically occurs at the intersection of a player’s first work motivation among organizational scientists (Locke opportunity for free agency (Isaacs [6]), peak performance [13]). According to expectancy theory of motivation, (Bradbury[7]) and the average duration of an MLB player’s individuals make decisions about how much effort they career (Hakes and Turner[8]). Washington National’s will apply to various tasks based on their subjective beliefs pitcher Max Scherzer summed up a player’s opportunity to about the probabilities that their effort will lead to better bargain as a free agent: performance and that performance will lead to desired "It's a mental test. Everybody is aware of it. You've outcomes (Vroom [14]). Harder [15] connected expectancy worked so hard for so long to put yourself in this theory and MLB free agency, theorizing players would position. How many guys make it five years in the big increase performance in their contract year to improve their leagues? Not many, so even to give yourself an bargaining ability to seek a more lucrative contract. Upon opportunity to get to free agency is an accomplishment” signing a free-agent contract, he found evidence of reduced (Crasnick[9]). performance, consistent with an explanation that after signing a free-agent contract, higher performance would no To the chagrin of many MLB organizations, some longer be rewarded with additional pay. This study draws players have not met performance expectations after on expectancy theory, predicting that players who signing a free-agent contract (Tylicki[10]). Recognizing overperformed in their contract year as compared to the competing interests in the high stakes of free agency, estimated performance significantly decreased this study incorporates an element of portfolio theory to performance in their free-agent year, such that it produced improve the approach by which organizations navigate free added monetary benefit to the player. agency. By introducing a model to estimate player performance in the contract year (a player’s last year before 1.2.2. Marginal Revenue Products becoming a free agent) and comparing the estimate to Extending the discussion of player performance and its actual performance in the same year, significant variations impact on team and organization outcomes, Scully [16], can be used to establish belief about a player’s performance Sommers & Quinton [17], and Kahn [18] incorporated the in the free-agent year (year after signing a free-agent idea of marginal revenue products (MRP). In the context of contract), offering additional insight into the applications MLB, Scully [16] defined a player’s MRP as “the ability or of equity theory and expectancy theory. performance that he (player) contributes to the team and the effect of that performance on gate receipts” (Scully [16],p. 1.2. Literature Review 916). Once a player’s MRP is computed, it can be compared to his salary in a given season; the difference 1.2.1. Equity Theory and Expectancy Theory in the between a player’s salary and his MRP is an economic rent Context of MLB Free Agency in favor of the organization or player. Equity theory and expectancy theory have emerged as the two lenses by which player performance around their 1.2.3. Sabermetrics period for free agency has been studied. J.S. Adams’ equity Estes [3] was one of the first scholars to stray from theory assumes people are motivated by conditions of individual performance measures, such as batting average equity. Adams[11] suggested a person senses inequity and home runs, to composite measures called sabermetrics, when he/she believes that the ratio of his/her perceived which offer a more comprehensive picture of player outcomes to perceived inputs is different than the same performance. One of the most widely accepted measures of ratio of another; he proposed that individuals reduce or player performance is on base percentage plus slugging eliminate inequity by altering inputs, such as their percentage, or OPS. Estes[3] explained that OPS has caught performance. Altering (decreasing) performance was first on with the baseball world because it is easy to calculate theorized in the context of MLB free agency at its onset in and is an excellent predictor of runs scored as it credits 1976 by Lord and Hohenfeld[12], suggesting players who hitters with getting on base (on base percentage) and the had not reached the opportunity to negotiate as free agents hitters ability to advance runners (slugging percentage). felt under-compensated compared to their teammates who had. Lord and Hohenfeld[12] found empirical evidence that players restored performance once they signed a free-agent 2. Objectives contract and began receiving equitable compensation, consistent with equity theory. This study also draws on 2.1. Research Questions and Hypotheses equity theory, predicting that players who underperformed in their contract year as compared to estimated performance Research Question #1: For first-time free agents, what is significantly increased performance in their free-agent year the relationship between OPS in the contract year and the to the point it produced added monetary benefit to the free-agent year? organization. Research Question #2: For players in their free-agent Universal Journal of Management 7(1): 31-38, 2019 33 year, what is the relationship between player OPS and first-time, free-agent contract during any year from 1976 economic rent? through the 2015.