Ranking MBA programmes

I recently posted on a study by the Economist that ranked NTU's MBA programme 77th best worldwide and NUS's MBA programme 99th best worldwide (4th and 11th best in Asia, respectively). In response, a reader commented: “Frankly speaking, to someone who's aiming for a top-10 MBA program in the US, who cares?”

Who cares indeed. A glib but nonetheless truthful response is that there must be some people who find the rankings informative/interesting/entertaining or why would the Economist spend the time and effort to produce the list in the first place? After all, people do apply to NUS and NTU and many don’t get accepted.

Nonetheless, I suspect that the commenter was trying to make the following point: only the “top-10” schools are worth attending in terms of financial rewards, making NUS and NTU irrelevant. Ok, that is a valid opinion and perhaps a predictable one for an ambitious MBA student. Still I wonder why the reader thinks that only the very "best" schools will provide the proper rewards. Is it true that lesser ranked schools don’t deliver a financial payoff? There is also a more fundamental question: what are the top-ten schools? There are several rankings that differ significantly because each is constructed with different criteria such as interviewing CEOs, deans, recruiters, business school graduates, and/or weighing admissions and placement data. So which rankings are the "right" ones?

Fortunately, I came across a paper that has already done the heavy lifting on this topic: The Best Business Schools: A Market-Base Approach by Joseph Tracy and Joel Waldfolgel, published in The Journal of Business in 1997.

From the article:

This article introduces a market-based methodology for evaluating the performance of MBA programs. We seek to distinguish the quality of a program from the quality of its students. We judge a program’s performance by its value added, measured by the graduates’ salaries, after accounting for student characteristics and job attributes.

The crux of their research is: which MBA programmes best increase your earning potential? This is a different question than the one implicitly or explicitly answered by other ranking methods: which programmes have the highest paid graduates? We all know that Harvard MBA graduates earn a lot of money. But is the Harvard MBA programme the primary reason? Or do people with high earning power choose to attend Harvard?

Article continued:

...we focus on the degree to which business programs are successful in producing high-salary jobs for their graduates. Given the competitive labor market for MBAs, salaries will reflect the willingness of employers to pay for the attributes embodied in a program's graduates. A program which attracts high-quality students may generate high salaries for its graduates without adding value to them.

Here is the bottom line. Using statistical techniques, they find programmes that are either "undervalued" or even unranked by the other ranking methods:

While four of our top five programs have been highly ranked elsewhere, 10 of our top 20 programs are unranked elsewhere. Like many other rankings, we place Stanford, Harvard, Chicago, Virginia, Pennsylvania, Northwestern, and Michigan in the top 10. In contrast to other rankings, we also place Oklahoma State, New Mexico, and Wake Forest in the top 10. By emphasizing program value added, our procedure identifies several programs that have been overlooked by other rankings because they do not recruit the very top students.

The authors use their procedure to rank 63 American MBA programmes.

Finally, some advice to students on how to use their rankings to choose a programme (however, note that this study was conducted with data from the early 1990s):

It is important to recognize that the value-added estimates, and associated rankings, are based on the current allocation of students to programs. Thus, our rankings should be understood to reflect the value added currently conveyed to the students at each of the programs, not the value added that would unconditionally be transmitted to any students at these programs. For example, while our results indicate that Oklahoma State has higher value added than, say, Dartmouth, students at Oklahoma State have, on average, lower GMATs and less work experience. Our evidence does not indicate whether Dartmouth students would fare better at Oklahoma State. Because different programs attract students of systematically different quality, a potential student interested in choosing a program with the most value added should compare value across programs with students of roughly his or her quality.

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