Country and Industry Importance in European Returns

We examine country and industry influences on returns of companies in 15 European countries from June 1989 to August 1998. We investigate the sources of earlier disparate conclusions on the relative influence of country and industry. We find that the conclusions on sector/industry influences depend on whether broader sector or narrower industry effects are examined. Importance of broadly defined sectors is low possibly because of low correlations among industries within sectors documented in our research. We found that over the whole time period country effects are more important than industry effects even after controlling for estimation errors that are inversely related to the number of companies in countries and industries. During the last five years, the research shows that country effect are becoming similar in size to industry effects. Our results suggest that industries are more important for large cap than small cap companies