Premium
Corporate Governance and Financial Peer Effects
Author(s) -
Fairhurst Douglas DJ,
Nam Yoonsoo
Publication year - 2019
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12240
Subject(s) - profitability index , leverage (statistics) , corporate governance , scrutiny , business , shock (circulatory) , monetary economics , capital structure , finance , external financing , accounting , economics , medicine , machine learning , computer science , political science , law , debt
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.