Bringing Institutions into Performance Persistence Research : Exploring the Impact of the Product, Financial, and Labor Market

This study challenges the implicit assumption of homogeneity in national institutional environments made in past studies of firm performance persistence. We propose that home country institutions matter. We focus on the impact of formal institutions in the product, financial and labor markets, arguing that they impact the size of pools of exchange partners and the types of exchanges allowed and condoned. Ultimately, these restrictions affect competitive intensity among firms and firm performance persistence. Using data for 10,000 firms from 33 countries over a ten-year time frame, we show that antitrust law strength, a product market institution designed to prevent collusion among firms, is associated with decreases in performance persistence. Unskilled labor market flexibility, a labor market institution that reduces legal constraints imposed on residual claimants (managers and owners) to take necessary actions to maintain or enhance profitability, is associated with increases in performance persistence. Product liability laws effectiveness, another product market institution, and corporate control markets development, a financial market institution, are positively associated with performance persistence only in the case of MNCs. The remaining financial and labor market institutions studies, public equity markets development (resp. skilled labor markets availability) have a positive (resp. negative) impact for domestic firms only