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Unobservable effects in structural models of business performance

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  • Annacker, Dirk
  • Hildebrandt, Lutz
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    Abstract

    Critiques of the concept of key success factors have raised objections both conceptually and methodologically. From the latter perspective, common research practice is criticized for neglecting the influence of firm-specific, unobservable variables (e.g., management skills). To control for these effects a structural equation approach (LISREL) to the analysis of panel data is proposed. In an empirical study based on the PIMS annual data base the influence of unobservables on the direct and indirect effects of product quality on profitability is examined. It is shown, how a step by step extension of a basic simultaneous equation model sheds some light on the role unobservable variables play. Even after controlling for persistent unobservable effects product quality and market share remain significant determinants of profitability. --

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    Bibliographic Info

    Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2002,22.

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    Date of creation: 2002
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    Handle: RePEc:zbw:sfb373:200222

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    1. Robert Jacobson, 1990. "Unobservable Effects and Business Performance," Marketing Science, INFORMS, INFORMS, vol. 9(1), pages 74-85.
    2. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, Econometric Society, vol. 46(5), pages 985-1012, September.
    3. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
    4. Noel Capon & John U. Farley & Scott Hoenig, 1990. "Determinants of Financial Performance: A Meta-Analysis," Management Science, INFORMS, INFORMS, vol. 36(10), pages 1143-1159, October.
    5. Robert D. Buzzell, 1990. "Commentary on “Unobservable Effects and Business Performance”," Marketing Science, INFORMS, INFORMS, vol. 9(1), pages 86-87.
    6. William Boulding & Richard Staelin, 1993. "A Look on the Cost Side: Market Share and the Competitive Environment," Marketing Science, INFORMS, INFORMS, vol. 12(2), pages 144-166.
    7. Jay B. Barney, 1986. "Strategic Factor Markets: Expectations, Luck, and Business Strategy," Management Science, INFORMS, INFORMS, vol. 32(10), pages 1231-1241, October.
    8. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, Elsevier, vol. 2(6), pages 429-444, November.
    9. Paul W. Farris & Mark E. Parry & Kusum L. Ailawadi, 1992. "Structural Analysis of Models with Composite Dependent Variables," Marketing Science, INFORMS, INFORMS, vol. 11(1), pages 76-94.
    10. Griliches, Zvi, 1974. "Errors in Variables and Other Unobservables," Econometrica, Econometric Society, Econometric Society, vol. 42(6), pages 971-98, November.
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