Corporate effects and dynamic managerial capabilities

TLDR

Corporate effects in variance decomposition capture heterogeneity of business performance from internal firm factors, yet most estimates omit time‑varying return fluctuations, hindering understanding of how corporate strategy and managerial actions adapt to changing environments. The study introduces dynamic managerial capabilities to explain heterogeneity in managerial decisions and firm performance amid changing external conditions. The authors conceptualize dynamic managerial capabilities as the framework linking managerial decisions to firm performance variability under shifting external conditions. The study finds that time‑varying corporate effects linked to managerial decisions are statistically significant within a single industry, even when external conditions are constant. © 2003 John Wiley & Sons, Ltd.

Abstract

Abstract 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 © 2003 John Wiley & Sons, Ltd.