Peer Effects in Corporate Governance Practices: Evidence from Universal Demand Laws
53 Pages Posted: 8 Nov 2018
Date Written: November 8, 2018
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 the staggered adoption of universal demand laws across states to identify causal peer effects in firms' decisions concerning CEO compensation, CEO duality, and anti-takeover provisions. Our results provide support for the existence of peer effect in the adoption of anti-takeover provisions. We find that the entrenchment index (E-Index) of a firm increases by 0.33 points for every point increase in the E-Index of firms in the same board interlock network. The impact of universal demand laws on the interlocking directors' prior 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
Suggested Citation: Suggested Citation