Corporate Governance and Financial Peer Effects

Abstract

Growing evidence suggests that managers select financial policies partially by mimicking policies of peer firms. We find that these peer effects in capital structure choice are unique to firms operating under weak external corporate governance. Cross‐sectional tests suggest that this finding is best explained by a quiet life hypothesis in which managers may be able to avoid the effort required to optimize financial policies and the scrutiny of market participants. Leverage ratios of mimicking firms display less sensitivity to a profitability shock. Finally, mimicking correlates to higher financing costs and lower future profitability, especially if it results in high leverage.

Peer effects, Financial Decisions and Industry Concentration

“…Peer effects are also observed in the firm's debt maturity choices (Duong, Ngo, & McGowan, 2015). Another upcoming study by Fairhurst and Nam (2018), shows that the U.S. firms that have weak external corporate governance, and higher chances of being taken over are more inclined towards mimicking their peers' capital structure choices.…”

Does environmental administrative penalty promote the quantity and quality of green technology innovation in China? Analysis based on the peer effect

“…The behavior of enterprises is not only affected by their economic interests but also by other enterprises with similar status and characteristics, resulting in changes in their decision-making and behavioral results (Zhu et al, 2021). The existing study of the corporate peer effect found that there are significant peer effects in corporate finance and governance decisions such as information disclosure decisions (Seo, 2021), corporate governance (Fairhurst and Nam, 2018), financial decisions (Liu et al, 2022), employee welfare policies (Rind et al, 2021), investment decisions (Wang et al, 2022), and violations (Lu and Chang, 2018). In terms of the peer effect of environmental administrative penalties, Wang Yun et al (2020) introduce the Deterrent Theory of punishment, empirically analyze the impact of environmental administrative penalties on the environmental protection investment of the peer enterprises, and find that environmental administrative penalties will produce a deterrent effect through the peer Frontiers in Environmental Science frontiersin.org influence path.…”

The peer contagion effects and firms' innovation: Evidence from China

“…According to the previous analysis, since innovation activities require significant long‐term investment of resources and a large amount of information cost, firms need to collect as much information as possible to evaluate innovation decisions and implement innovative behaviors, while obtaining peer information through various channels to ensure a competitive advantage in innovation strength. Some managers are generally characterized by limited rationality and risk aversion, and especially the less capable managers are under greater psychological pressure to face the capital‐intensive and long‐cycle innovation process, while the cost of searching for information about innovation is higher, and thus tend to choose the most conservative innovation strategy and follow the innovation behavior of peer firms (Fairhurst & Nam, 2018). According to the resource dependency theory, managers with higher competence use their high‐quality social network to bring time‐sensitive information and key resources to the firm, remove the complex and tedious information noise in the market, and reduce information asymmetry within the firm and between the industry and the market.…”

“…Mas and Moretti (2009) argues that in addition to factors such as firm size and profitability, competitors' compensation levels need to be included in the executive compensation function, and Albuquerque et al (2013) find significant peer contagion effects for corporate executive compensation. In addition, researchers have found peer contagion effects for corporate capital structure decisions (Fairhurst & Nam, 2018; Francis et al, 2016), investment decisions (Frésard & Valta, 2016), stock split decisions (Kaustia & Rantala, 2015), dividend policy (Grennan, 2019; Yan & Zhu, 2020), debt maturity structure (Duong et al, 2015), cash holding levels (Chen et al, 2019), and violations (Parsons et al, 2018).…”