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

Gerry McNamara, Federico Aime, Paul M. Vaaler

Research output: Contribution to journalReview articlepeer-review

43 Scopus citations

Abstract

Hawawini, Subramanian, and Verdin (2003) examined the relative impact of industry- vs. firm-level 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 within-industry 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.

Original languageEnglish (US)
Pages (from-to)1075-1081
Number of pages7
JournalStrategic Management Journal
Volume26
Issue number11
DOIs
StatePublished - Nov 1 2005

Keywords

  • Industry and firm effects
  • Outliers
  • Variance components

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