Premium
Do Peer Firms Affect Corporate Financial Policy?
Author(s) -
LEARY MARK T.,
ROBERTS MICHAEL R.
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12094
Subject(s) - leverage (statistics) , affect (linguistics) , business , externality , capital structure , peer effects , monetary economics , peer group , peer to peer , corporate finance , finance , economics , microeconomics , debt , social psychology , psychology , philosophy , linguistics , developmental psychology , machine learning , computer science , distributed computing
We show that peer firms play an important role in determining corporate capital structures and financial policies. In large part, firms' financing decisions are responses to the financing decisions and, to a lesser extent, the characteristics of peer firms. These peer effects are more important for capital structure determination than most previously identified determinants. Furthermore, smaller, less successful firms are highly sensitive to their larger, more successful peers, but not vice versa. We also quantify the externalities generated by peer effects, which can amplify the impact of changes in exogenous determinants on leverage by over 70%.