How Performance Expectations Affect Managerial Replacement Decisions
27 Pages Posted: 5 Dec 2010 Last revised: 3 Jul 2012
Date Written: June 21, 2012
Abstract
In this paper, we empirically investigate how performance expectations affect top manager replacements. Specifically, we approximate unobservable performance expectations based on professional bookmaker betting odds on matches of the highest German soccer league, the Bundesliga, to capture the effect on the dismissal probability of team coaches. Soccer coaches, like top managers in other industries, are typically held accountable for the performance of their organization although their idiosyncratic contributions are not exactly measurable. Betting odds are highly immune to opportunistic manipulations on behalf of the coaches and provide accurate predictions of match outcomes. We show that an increase of performance expectations in the previous match by one standard deviation nearly doubles the dismissal probability of the coach, controlling for team performance and unobserved team heterogeneity. We consider our study to be a strong test for the impact of performance expectations on managerial replacements because accurate performance measures are available at frequent intervals in the controlled field environment of professional soccer. In other managerial contexts, in which performance measurement is typically noisier, the expectation effect should be even stronger. The limitations of transferability are also discussed.
Keywords: Betting odds, board of directors, performance expectations, professional team sports, top manager dismissals
JEL Classification: D84, J44, J63
Suggested Citation: Suggested Citation