Peer Effects in Corporate Governance Practices: Evidence from Universal Demand Laws

50 Pages Posted: 5 Sep 2017

See all articles by Pouyan Foroughi

Pouyan Foroughi

York University - Schulich School of Business

Alan J. Marcus

Boston College - Department of Finance

Vinh Nguyen

The University of Hong Kong - School of Economics and Finance

Hassan Tehranian

Boston College - Department of Finance

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Date Written: August 17, 2017

Abstract

Firms in the same networks tend to have similar corporate governance practices. However, it is difficult to distinguish between peer effects, where governance practices propagate from one firm to another, and selection effects, where firms with similar governance preferences self-select into linked groups. Studying board-interlocked firms, we utilize a novel instrument based on staggered adoptions of universal demand laws across states to identify causal peer effects in firms' decisions to adopt various governance provisions. We find that a firm's propensity to adopt these provisions increases after other firms in the same board interlock network choose to adopt similar policies. The impact of universal demand laws on the incentives faced by directors as they seek to maximize their career outcomes is a likely mechanism explaining these effects.

Suggested Citation

Foroughi, Pouyan and Marcus, Alan J. and Nguyen, Vinh and Tehranian, Hassan, Peer Effects in Corporate Governance Practices: Evidence from Universal Demand Laws (August 17, 2017). Available at SSRN: https://ssrn.com/abstract=3031399 or http://dx.doi.org/10.2139/ssrn.3031399

Pouyan Foroughi

York University - Schulich School of Business ( email )

111 Ian MacDonald Blvd
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Alan J. Marcus

Boston College - Department of Finance ( email )

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617-552-2767 (Phone)
617-552-0431 (Fax)

Vinh Nguyen (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

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Kennedy Town
Hong Kong

Hassan Tehranian

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-3944 (Phone)
617-552-0431 (Fax)

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