Unpacking firm effects: modeling political alliances in variance decomposition of firm performance in turbulent environments

Rodrigo Bandeira de Mello and Rosilene Marcon

RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), 2005, vol. 9, issue spe1, 65-85

Abstract: In this paper, firm heterogeneity in turbulent environments is addressed. It is argued that previous studies have not taken into account effects of a turbulent environment, like the Brazilian context, in which firms must face a weak and erratic government. In such an environment, the large portion of variance usually attributed to firm effects may be explained, not by the usual assumptions of mainstream scholars, but by a more political view of firm differences, namely, the ability to manage valuable political alliances. To account for these differences, a multivariate performance measure was construed and a new factor, politics effects, has been introduced to the usual model. Company donations for campaign funds in elections was used as a proxy for this factor. A sample of 607 observations, of 177 firms in 15 sectors was used. Results suggest that the presence of politics effects were found to be not significant (using COV and Hierarchical ANOVA). However, different from previous studies, transient industry effects appear to be more important than stable effects. Findings also indicate that a better model specification for turbulent environments is needed and highlight the importance of the cost of capital.

Date: 2005
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