The relative importance of group-level effects on the performance of German companies

We examine the impact of performance groups on the estimation of therelative importance of ¯rm, industry and other e®ects on corporate performance.Performance groups comprise ¯rms from the same industry with asimilar performance over a longer period of time. We present a statisticalmethod which improves the procedure of variance decomposition by allowing¯rm e®ects and the interacting e®ects of ¯rms and time to be uni¯ed into thegroup e®ects. Applied to a German data set of 219 companies observed overa period of eleven years (1987-1997) it appears that the majority of the ¯rmscan be ascribed to performance groups. The variance proportion of the groupe®ects is about one half of the non-grouped ¯rm e®ects. They explain about17.9 percent of the total variance of the returns.