Do Peer Firms Affect Corporate Financial Policy?

The following post comes to us from Mark Leary of the Finance Department at Washington University and Michael Roberts of the Finance Department at the University of Pennsylvania.

In the paper, Do Peer Firms Affect Corporate Financial Policy? which was recently made publicly available on SSRN, we show that corporate financial policies are highly interdependent. Firms make financing decisions in large part by responding to the financing decisions of their peers, as opposed to changes in firm-specific characteristics.

We find that, on average, a one standard deviation change in peer firms’ leverage ratios is associated with an 11% change in own firm leverage ratios—a marginal effect that is significantly larger than that of any other observable determinant and one that is driven by interdependencies among debt and equity issuance decisions.

Consistent with information- based theories of learning and reputation, we find that smaller, more financially constrained firms with lower paid and less experienced CEOs are more likely to mimic their peers. Additionally, we quantify the externalities engendered by these peer effects, which can amplify the impact of changes in exogenous determinants on leverage by almost 70%.

The full paper is available for download here.

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