Corporate Governance and Financial Peer Effects

51 Pages Posted: 15 May 2018

See all articles by Douglas J. Fairhurst

Douglas J. Fairhurst

Washington State University

Yoonsoo Nam

Washington State University

Date Written: May 2, 2018


Growing evidence suggests that managers select financial policies partially by mimicking the financial policies of peer firms. This paper documents that the use of these peer effects in capital structure choice is unique to firms operating in a weak external corporate governance environment. Further, cross-sectional tests suggest that this finding is best explained by a quiet life hypothesis in which managers may be able to avoid both the effort required to optimize financial policies and the scrutiny of market participants. We also show that leverage ratios of mimicking firms display less sensitivity to a shock to profitability. Finally, mimicking correlates to higher financing costs and lower future profitability, especially if it results in high leverage ratios.

Keywords: Peer Effects, Corporate Governance, Capital Structure

JEL Classification: G32, G34

Suggested Citation

Fairhurst, Douglas J. and Nam, Yoonsoo, Corporate Governance and Financial Peer Effects (May 2, 2018). Available at SSRN: or

Douglas J. Fairhurst (Contact Author)

Washington State University ( email )

Todd Hall
P.O. Box 644746
Pullman, WA WA 85721-0108
United States

Yoonsoo Nam

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

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