Co is the covariance between a and B. The covariance term captures covariance between the corporation and the industry consistent with Schmalensee. This would be equivalent to the contribution from firms picking profitable industries(Schmalensee, 1985). However, Rumelt does not include the possibility that corporate effects may also covary with business effects in his model. Rumelt imposes the assumption that corporate and business unit effects are uncorrelated e, across corporations, corporate effects cannot correlate with business unit effects. Strategic management may argue for an association between business-unit and corporate effects if well-managed corporations both pick profitable businesses to enter and manage them well. For example, if high performance corporations achieve such performance by selecting high performance business units, this corporate effect might be masked as a business effect using VCA. While corporate strategy emphasizes activities that should create associations between business unit and corporate effects, VCA does not capture this correlation as part of its corporate effect. That is, if corporations differ in their ability to pick high performance business units, this capability will not necessarily be picked up as a corporate effect. Thus, one questions the underlying structural assumptions of using this model, without adjusting for this possibility More recent studies of industry, corporate and business effects use data from COMPUSTAT(Roquebert, et al, 1996; McGahan Porter, 1997a). COMPUSTAT provides more recent data on a larger sample of firms, but defines the"business"according to the accounting treatment of business segments rather than the Ftc's line of business approach Business segments tend to include business units with similar product lines. Given the size of the business segment, the use of business segments should produce a large business effect and reduce the corporate effect(McGahan& Porter, 1997a), yet these studies produce larger 8