Firms Effects Versus Industry Effects : Are They Necessary For Firm Performance? A Necessary Condition Analysis

This paper revisits the firm-industry effect discourse. Using necessary Condition Analysis (NCA), we attempted to empirically address two debate related questions: Is a high level of industry-fixed effects necessary for a high level of firm performance? And, is a high level of firm-fixed effects necessary for a high level of firm performance? Employing a dataset with 1,776 observations, drawn from a sample of public firms in various industries, and using four accounting measures to study the evolution of firm performance (our dependent variable) over a five-year period, we tested our hypothesized conditions while accounting for firm and industry effects (our independent variables, respectively). NCA scatter plots and NCA key quantitative parameters were used for testing the study hypotheses. Our findings point to the dominance of industry effects in explaining variance in firm performance over the years under study. Namely, accounting for industry-fixed effects was associated with variables’ effect size that emerged as substantively and statistically significant, and hence necessary for firm performance. On the other hand, while accounting for firm-fixed effects resulted in variables with small effect size that appeared to be substantive, most emerged as statistically insignificant, and thus unnecessary for firm performance. Theoretical, methodological, and managerial implications are discussed, and future research direction is proposed