Unobservable effort, objective consistency and the efficiencies of the principal and the top management team

Linlin Zhao, Yong Zha, Rui Hou and Liang Liang

Journal of the Operational Research Society, 2019, vol. 70, issue 6, 1011-1026

Abstract: Top management team (TMT) plays a leading role in making strategic decisions and business success. On account of unobservable and immeasurable characteristics of the TMT’s effort, prior researches are of limited use in identifying its impact on the performances of the principal and TMT. This paper formulates novel models to overcome the limitations by incorporating DEA and bi-level programming into the principal–agent framework. We begin with the basic models from the perspective of the principal and the TMT respectively, and propose integrated and bi-level models to illustrate the cooperative and leader–follower collaboration between the two parties. We then develop an effort-based DEA model in which the effort of the TMT is viewed as a variable. By comparing optimal value of the variable with zero, we can identify whether the effort level is desired by the principal. A higher value larger (lower) than zero implies that the members of TMT exert higher (lower) effort. Further, we identify objective consistence between the two parties by incorporating the organisational outcomes into the outputs of the TMT. A case study of 16 China listed real estate companies shows that the TMT’s effort has a significant influence on the efficiencies of the principal and the TMT. In addition, the TMT has an initiative incentive to adjust the effort level to adapt various situations of objective consistence and inconsistence.

Date: 2019
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DOI: 10.1080/01605682.2018.1487814

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