Is performance driven by industry- or firm-specific factors? A response to Hawawini, Subramanian, and Verdin

Abstract

2003) examined the relative impact of industry-vs. firmlevel factors shaping firm performance. They demonstrated that variance in firm performance attributable to industry-level factors increases, while variance attributable t to firm-level factors decreases when 'exceptionally' higher-and lower-performing 'outlier' firms in each industry are excluded. They concluded that previous research underestimated the relative impact of industry-level factors for 'average' firms that make up the bulk of an industry. We take issue with their methods used to identify and exclude outliers as well as their conclusions drawn from such analyses. Rather than excluding true 'outlier' firms, we argue that they incorporated an artificial restriction of within-industry sample variance that almost deterministically led to lower firm and higher industry variance component estimates. We demonstrate this point with a comparable sample of data to which we apply progressively greater restrictions on withinindustry sample variance leading to similar results. Finally, we show that exclusion of firms from a data sample based on commonly understood standards of outlier identification leads to little change in industry and firm variance component estimates compared to full-sample estimates.

What drives firm profitability? A multilevel approach to the Spanish agri-food sector

“…Most previous studies employ ANOVA or COV to decompose the variation in firm profitability into different effect classes (Rumelt, 1991;McGahan & Porter, 1997;McNamara et al, 2005). However, both techniques have limitations resulting from their underlying assumptions, sometimes generating inconsistent and unreliable results (Misangyi et al, 2006).…”

Evidence on competitive advantage and superior stock market performance

“…1 His ratio of firm-specific to industry-specific effects is almost ten to one. Later research confirms Rumelt's finding, but at a somewhat smaller level (McGahan and Porter, 1997;McGahan 1999;Bowman and Helfat, 2001;Spanos and Lioukas, 2001;Hawawini et al, 2003 andVillalonga 2004;McNamara et al, 2005;Tong and Reuer, 2006;Misangyi et al, 2006). The majority of empirical studies employ return on assets or other accounting-based profitability measures to represent firm performance.…”

“…Our next robustness test is to analyze the impact of having removed 1% of the highest and lowest annual observations of the measured competitive advantage and its three sources (Hawawini et al, 2003 andMcNamara et al, 2005); see Table 1. Table 12 reports the results over the last ten years of our sample period with no removal of the 1% biggest strateg-ic leaders and losers, after utilizing a three-factor risk-adjustment of the required rate of return on equity.…”

Evidence on Competitive Advantage and Superior Stock Market Performance

“…Later research confirms Rumelt's finding, but at a somewhat smaller level (McGahan and Porter, 1997;McGahan 1999;Bowman and Helfat, 2001;Spanos and Lioukas, 2001;Hawawini et al, 2003 andVillalonga 2004;McNamara et al, 2005;Tong and Reuer, 2006;Misangyi et al, 2006). The majority of empirical studies employ return on assets or other accounting-based profitability measures to represent firm performance.…”

“…This represents the industry-based competitive advantage, since the average resource-based advantage by construction must be approximately zero. As we shall see, this does not necessarily imply that the industry-based 19 All removed observations will be utilized later in a robustness test; see McNamara et al (2005) and Table 12.…”