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Key words: corporate effects; dynamic capabilities; human capital; social capital; cognition
Corporate effects in variance decomposition capture heterogeneity of business performance derived from factors internal to firms at the corporate level. Most estimates of corporate effects do not include effects associated with fluctuations in returns over time, except insofar as the fluctuations affect the average corporate return for the time period in question. Exclusion of the time-varying dimension of the corporate effect makes it difficult to fully understand the effect of corporate strategy and the actions of corporate managers, particularly in response to a changing environment. The evidence in this article shows that within a single industry, where managers face the same external environment, time-varying corporate effects associated with corporate level managerial decisions are statistically significant. We introduce the concept of dynamic managerial capabilities to underpin the finding of heterogeneity in managerial decisions and firm performance in the face of changing external conditions. Copyright (C) 2003 John Wiley & Sons, Ltd.
INTRODUCTION
Is there a corporate effect on profitability? The collective research of the past two decades suggests that the answer is clearly yes (see Bowman and Helfat, 2001, for an analysis and review). Although studies such as those of Schmalensee (1985) and Rumelt (1991) found negligible corporate effects, many other studies have reported larger and statistically significant corporate effects. Most studies, however, have omitted time-varying corporate effects that reflect important aspects of corporate strategy. In this paper, we estimate time-varying corporate effects associated with corporate-level managerial decisions, and introduce the concept of dynamic managerial capabilities to underpin our findings.
In variance decomposition, corporate effects generally derive from differences between multibusiness firms in the average of returns to individual businesses within each firm. Because variance decomposition captures differences between firms, the technique provides a means of documenting sources of heterogeneity in business performance. Thus, the finding of a large business effect on profitability (e.g., Rumelt, 1991) points to the important impact of differences between firms in their business-level resources. Similarly, a nontrivial and statistically significant corporate effect implies that firms differ in the impact that their corporate-level resources have on profitability.
Although corporate effects are by now well documented, with few exceptions (e.g., Bercerra, 1997; McGahan and Porter, 1999), most variance decomposition studies...