The Cost of Being Different: Peer Firm Costs of Cash Holdings

72 Pages Posted: 24 May 2017 Last revised: 20 Feb 2018

Date Written: January 18, 2018


I estimate a dynamic game where firms make external financing decisions and hold cash taking into account the corresponding behavior of their peers. A key advantage of this approach is that I can obtain an empirical measure of peer effects that stem from decision makers' dynamic optimization problem. Firms' cash holdings reveal a significant negative value attached to falling below the peer group median cash-to-capital ratio. Firms with more complex information environments and firms that rely less on R&D in their business model put relatively larger emphasis on peer firms in their decision making. Interpreting the model parameters akin to a counterfactual analysis demonstrate that firms significantly alter their behavior in a world characterized by peer effects compared to a world without peer effects.

Keywords: Peer Effects, Strategic Interaction, Cash, External Finance, Dynamic Game, Structural Estimation

JEL Classification: D92, G32, L21

Suggested Citation

Kjenstad, Einar C., The Cost of Being Different: Peer Firm Costs of Cash Holdings (January 18, 2018). Available at SSRN: or

Einar C. Kjenstad (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
Aarhus, 8000

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