How Much Does Industry Matter, Really?

In this paper, we examine the importance of year, industry, corporate-parent, and businessspecific effects on the profitability of U.S. public corporations within specific 4-digit SIC categories. Our results indicate that year, industry, corporate-parent, and business-specific effects account for 2 percent, 19 percent, 4 percent, and 32 percent, respectively, of the aggregate variance in profitability. We also find that the importance of the effects differs substantially across broad economic sectors. Industry effects account for a smaller portion of profit variance in manufacturing but a larger portion in lodging/entertainment, services, wholesale/retail trade, and transportation. Across all sectors we find a negative covariance between corporate-parent and industry effects. A detailed analysis suggests that industry, corporate-parent, and business-specific effects are related in complex ways.  1997 by John Wiley & Sons, Ltd.