An International Study of Peer Effects on Corporate Investments

Abstract

Using a large sample of 17,747 firms from 44 countries, we find significant positive peer effects on corporate investment. Specifically, a firm increases its investments by 2% to 6% in response to a one standard deviation increase in peer firms' investments. Further analyses show significant within-country heterogeneity, as peer effects are salient for larger, mature, high-tangibility and high-market power firms with ample resources and latitude to respond to rival firms. In contrast, we find no significant cross-country heterogeneity in peer effects conditional on institutional quality, legal origin, and financial development, suggesting that peer effects similarly matter across countries. Our results further show that mimicking peer firms' investments positively affects shareholder value, with this effect being salient in good macroeconomic states. In summary, our study shows substantial industrial interdependence in corporate investments which might amplify positive and negative firm-specific shocks within and across industries and countries.

Keywords: Peer effects, capital expenditure, institutions, financial development, financial crisis, mimicking.

JEL Classification: C31, C32, D22