Variance decomposition of firm performance: past, present and future

Abstract

Purpose The purpose of this paper is to present a review of variance decomposition studies of firm performance and the theoretical foundations that served as the antecedents and promptings for this stream of research. Known collectively as “variance decomposition literature,” these studies use variance decomposition techniques to partition firm performance into various classes of effects in a bid to unveil the relative importance of factors responsible for firm performance variance. Design/methodology/approach A review of papers published in SCOPUS and institute for scientific information indexed journals was conducted. Findings The study found that firm, industry, corporate, business group and country effects are the major effects included in most extant studies. However, of all effects, firm effects remain the dominant and most important impact on firm performance. The effects that affect firm performance are also interdependent. Practical implications Consequently, the decisions of managers in firms are still the most important element in helping the firm to navigate industry and contextual factors, especially during periods of recession. Originality/value From the review, research gaps were identified and suggestions for future research provided. There is still much to learn from variance decomposition literature in an age of new business models, unprecedented start-up firms and from developing and emerging market countries.