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

53 Pages Posted: 8 Nov 2018

See all articles by Pouyan Foroughi

Pouyan Foroughi

University of New South Wales

Alan J. Marcus

Boston College - Department of Finance

Vinh Nguyen

The University of Hong Kong

Hassan Tehranian

Boston College - Department of Finance

Multiple version iconThere are 4 versions of this paper

Date Written: November 8, 2018

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 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

Foroughi, Pouyan and Marcus, Alan J. and Nguyen, Vinh and Tehranian, Hassan, Peer Effects in Corporate Governance Practices: Evidence from Universal Demand Laws (November 8, 2018). Available at SSRN: https://ssrn.com/abstract=3280862 or http://dx.doi.org/10.2139/ssrn.3280862

Pouyan Foroughi

University of New South Wales ( email )

Sydney, NSW 2052
Australia

Alan J. Marcus

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
617-552-2767 (Phone)
617-552-0431 (Fax)

Vinh Nguyen (Contact Author)

The University of Hong Kong ( email )

833 KK Leung Building
Pok Fu Lam Road
Hong Kong
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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