Identifying a distinctive competence: forecasting ability in the money fund industry

Abstract

Testing the causal link between a firm-specific competence and its antecedents or consequences has become a key objective for strategy research over the past decade. On one hand, case studies can identify a competence, but with their small sample size, their retrospective research design, and their tendency toward sampling on the dependent variable, they can not reliably test the causal connection between a competence and its antecedents or its consequences. On the other hand, variance decomposition studies demonstrate the existence of firm-specific performance differentials but have not identified which particular competencies are responsible for them. The present paper avoids both of these problems by measuring a particular competence across a large sample of organizations over a long period of time, so that a test of statistical causality can be applied to the relationship of this competence to both its antecedents and its consequences. The particular competence studied is the ability of money market mutual funds to forecast changes in short-term interest rates—a competence known from prior research to be both valuable and rare. In particular, we test the effect of forecasting ability on the economic surplus generated by the fund and its growth. Conversely, we also test the effect of growth on the subsequent development of forecasting ability. Copyright © 2000 John Wiley & Sons, Ltd.