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Is performance driven by industry - or firm - specific factors? A new look at the evidence (RV of 2000/80/FIN)

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In this study the authors revisit the question of whether firms' performance (usually measured as return on assets or ROA) is driven primarily by industry- or firm-specific factors by extending past studies in two major ways. First, they examine if the findings of past research can be generalized across all firms in an industry or whether it depends on a particular class of firms within the same industry. Second, in a departure from past research, they use value-based measures of performance (economic profit or residual income and market-to-book value) instead of accounting ratios. They also use a new data set and a different statistical approach for testing the significance of the independent effects. Their study uncovers an important phenomenon that may in large part be responsible for the strong firm-effect reported in past studies. The authors show that a significant proportion of the absolute estimates of the variance of firm-specific factors in their study is due to the presence of a few exceptional firms in an industry: the two firms that outperform their industry and the two that under-perform in comparison to the rest. In other words, only for a few dominant value creators (leaders) and destroyers (losers) do firm-specific assets matter more than industry factors. For most firms, i.e. for those that are not notable leaders or losers in their industry, the industry effect turns out to be more important for performance than firm-specific factors. A possible explanation of this phenomenon is that superior (or poor) management leads to superior (or poor) firm performance irrespective of industry structure, which matters only for firms "stuck in the middle", i.e. for firms with average managerial capabilities and performance. The authors also show that this phenomenon does not depend on the metrics used to measure performance.

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