Corporate Governance and Financial Peer Effects
51 Pages Posted: 15 May 2018
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: Suggested Citation