Network Effects in Corporate Financial Policies

65 Pages Posted: 15 Oct 2020

See all articles by William Grieser

William Grieser

Texas Christian University

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

James P. LeSage

Texas State University - McCoy College of Business Administration

Morad Zekhnini

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Date Written: July 23, 2020

Abstract

We study the role of peer effects in capital structure decisions by exploiting the heterogeneous and intransitive nature of product market networks combined with spatial econometric techniques that account for these features. In contrast to prior work, this approach allows us to provide economically meaningful estimates of the magnitude of the causal role of peer effects in capital structure decisions. Our estimates indicate an initial sensitivity of a firm's leverage choice to peer average leverage on the order of .20, indicating a substantive but moderate level of strategic complementarity in capital structure decisions. Our modeling allows peer effects to vary by a firm's location in the product market network, with more central firms having relatively larger aggregate effects on their set of network peers. Our evidence appears most likely to reflect strategic behavior. Extensions of our modeling framework to related finance questions are also briefly considered.

Keywords: Capital Structure, Peer Effects, Networks, Spatial Econometrics

JEL Classification: G31, G32, C40

Suggested Citation

Grieser, William and Hadlock, Charles J. and LeSage, James P. and Zekhnini, Morad, Network Effects in Corporate Financial Policies (July 23, 2020). Available at SSRN: https://ssrn.com/abstract=3659634 or http://dx.doi.org/10.2139/ssrn.3659634

William Grieser (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

315 Eppley Center
East Lansing, MI 48824-1121
United States
517-353-9330 (Phone)
517-432-1080 (Fax)

James P. LeSage

Texas State University - McCoy College of Business Administration ( email )

Finanace and Economics Department
601 University Drive
San Marcos, TX 78666
United States
512-245-0256 (Phone)
512-245-3089 (Fax)

HOME PAGE: http://www.spatial-econometrics.com

Morad Zekhnini

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

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