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: Suggested Citation