DEPARTEMENT TOEGEPASTE ECONOMISCHE WETENSCHAPPEN

In this study we 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, we 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, we use value-based measures of performance (economic profit or residual income and market-to-book value) instead of accounting ratios. We also use a new data set and a different statistical approach for testing the significance of the independent effects. Our study uncovers an important phenomenon that may in large part be responsible for the strong firm-effect reported in past studies. We show that a significant proportion of the absolute estimates of the variance of finn-specific factors in our 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. We also show that this phenomenon does not depend on the metrics used to measure performance. influence the relative importance of firm-specific and industry effects? And what is the relative magnitude of these effects for firms that are 'stuck in the middle'? make a rough attempt to identify an industry's value leaders and losers. Exact definitions of a value leader or loser are debatable, but our purpose here is to give some preliminary attention to the influence of such 'outliers' on firm-specific and industry effects, and to the importance of these effects on firms in the middle. The following procedure is used to identify value leaders and losers in industry. To be identified as a value leader in its industry a firm must meet two criteria.