Bringing institutions into performance persistence research: Exploring the impact of product, financial, and labor market institutions

Abstract

This study challenges the implicit assumption of homogeneity in national institutional environments made in past studies of firm performance persistence. We propose that home-country institutions matter. We focus on the impact of formal institutions in the product, financial, and labor markets, arguing that they affect the size of pools of exchange partners and the types of exchanges allowed and condoned. Ultimately, these restrictions affect competitive intensity among firms, and firm performance persistence. Using data for over 10,000 firms from 33 countries over a 10-year time frame, we show that antitrust law strength, a product market institution designed to prevent collusion among firms, is associated with decreases in performance persistence. Unskilled labor market flexibility, a labor market institution that reduces legal constraints imposed on residual claimants (managers and owners) to take necessary actions to maintain or enhance profitability, is associated with increases in performance persistence. Product liability law effectiveness, another product market institution, and corporate control market development, a financial market institution, are positively associated with performance persistence only in the case of MNEs. The two remaining financial and labor market institutions, public equity market development (respectively skilled labor market availability) have a positive (respectively negative) impact for domestic firms only.