Do Peer Firms Affect Corporate Financial Policy?
Mark T. Leary
Washington University in St. Louis - Olin Business School; National Bureau of Economic Research (NBER)
Michael R. Roberts
The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)
July 30, 2010
We show that corporate financial policies are highly interdependent; firms make financing decisions in large part by responding to the financing decisions of their peers, as opposed to changes in firm-specific characteristics. On average, a one standard deviation change in peer firms' leverage ratios is associated with an 11% change in own firm leverage ratios --- a marginal effect that is significantly larger than that of any other observable determinant and one that is driven by interdependencies among debt and equity issuance decisions. Consistent with information-based theories of learning and reputation, we find that smaller, more financially constrained firms with lower paid and less experienced CEOs are more likely to mimic their peers. Additionally, we quantify the externalities engendered by these peer effects, which can amplify the impact of changes in exogenous determinants on leverage by almost 70%.
Number of Pages in PDF File: 57
Keywords: Peer effects, Capital structure, Financing choice, Externalities, Industry
JEL Classification: G32
Date posted: June 12, 2010 ; Last revised: December 13, 2011