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

Abstract

Firms in the same networks tend to have similar corporate governance practices. However, it is difficult to disentangle peer effects, where governance practices propagate from one firm to another, from 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 on CEO's compensation, CEO duality, and anti-takeover provisions. Our results thus provide support for the existence of peer effect in the adoption of anti-takeover 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 interlocking directors' experience in passing these provisions is a likely mechanism explaining these effects.

Keywords: corporate governance; board interlocks; peer effects; derivative lawsuits

JEL Classification: G34; G38