Peer effects, Financial Decisions and Industry Concentration
Purpose- This article reviews literature related to peer effects and different financial decisions. It further summarizes the theory and motives that drive peer effects. Also, the study highlights the influence of industry concentration on peer interaction in financial decision making. This content analysis of scantily available peer effect literature has been performed to highlight the significance of peer effects in financial decision making like investment, cash holding, leverage and many more. Most of the existing peer effects literature focuses on the U.S. However, peer effects also occur in other countries but empirical evidence is comparatively limited. But, managers may take into consideration their industry peers especially if their firms are operating in highly competitive environments.
Design/Methodology- Content analysis approach is applied to review prevailing financial literature on peer interactions and financial decisions with a special focus on industry concentration in explaining the peer effects.
Practical Implications- As the prime focus of managerial decisions is to maximize the firm’s value. Hence, information about peers would be helpful in making better decisions, especially in highly competitive environments. Also, this review of selected literature provides pathways for future research in investigating the motives of peer effects.
Adhikari, B. K., & Agrawal, A. (2018). Peer influence on payout policies. Journal of Corporate Finance, 48, 615-637. DOI: https://doi.org/10.1016/j.jcorpfin.2017.12.010
Almazan, A., & Molina, C. A. (2005). Intra-industry capital structure dispersion. Journal of Economics & Management Strategy, 14(2), 263–297. DOI: https://doi.org/10.1111/j.1530-9134.2005.00042.x
Banerjee, A. V. (1992). A simple model of herd behavior. The Quarterly Journal of Economics, 107(3), 797–817. DOI: https://doi.org/10.2307/2118364
Bikhchandani, S., Hirshleifer, D., & Welch, I. (1992). A theory of fads, fashion, custom, and cultural change as informational cascades. Journal of Political Economy, 100(5), 992-1026. DOI: https://doi.org/10.1086/261849
Billett, M. T., Garfinkel, J. A., & Jiang, Y. (2017). Capital supply, financial intermediaries, and corporate peer effects. Kelley School of Business Research Paper No. 16-38.
Bolton, P., & Scharfstein, D. (1990). A theory of predation based on agency problems in financial contracting. American Economic Review, 80(1), 93–106.
Brigham, E. F., & Houston, J. F. (2009). Fundamentals of Financial Management. Mason: Cengage Learning.
Brounen, D., Jong, A., & Koedijk, K. (2006). Capital structure policies in Europe: Survey evidence. Journal of Banking & Finance, 30(5), 1409–1442. DOI: https://doi.org/10.1016/j.jbankfin.2005.02.010
Cao, J., Liang, H., & Zhan, X. (2018). Peer effects of corporate social responsibility. Management Science, forthcoming.
Chen, S., & Ma, H. (2017). Peer effects in decision-making: Evidence from corporate investment. China Journal of Accounting Research, 10(2), 167–188. DOI: https://doi.org/10.1016/j.cjar.2016.11.002
Chen, Y. -W., & Chang, Y. (2013). Peer effects on corporate cash holdings. Working Paper series. Retrieved from Erişim Adresi http://www.sfm.url.tw/20thSFM/pdf/CompletePaper/028-670909802. pdf (01.05. 2016).
Chevalier, J. A., & Scharfstein, D. S. (1996). Capital-market imperfections and countercyclical markups: Theory and evidence. The American Economic Review, 86(4), 703-725.
Colombage, S. R. (2007). Consistency and controversy in corporate financing practices: Evidence from an emerging market. Studies in Economics and Finance, 24(1), 51-71. DOI: https://doi.org/10.1108/10867370710737382
Duong, H. K., Ngo, A. D., & McGowan, C. B. (2015). Industry peer effect and the maturity structure of corporate debt. Managerial Finance, 41(7), 714 - 733. DOI: https://doi.org/10.1108/MF-02-2014-0050
Foucault, T., & Fresard, L. (2014). Learning from peers' stock prices and corporate investment. Journal of Financial Economics, 111(3), 554–577. DOI: https://doi.org/10.1016/j.jfineco.2013.11.006
Francis, B. B., Hasan, I., & Kostova, G. L. (2016). When do peers matter?: A cross-country perspective. Journal of International Money and Finance, 69, 364–389. DOI: https://doi.org/10.1016/j.jimonfin.2016.06.009
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: evidence from the field. Journal of Financial Economics, 60(2-3), 187–243. DOI: https://doi.org/10.1016/S0304-405X(01)00044-7
Im, H. J., Kang, Y., & Park, Y. J. (2018). Economic policy uncertainty and peer effects in corporate investment policy: Evidence from China. doi:http://dx.doi.org/10.2139/ssrn.2713102 DOI: https://doi.org/10.2139/ssrn.2713102
Joo, C., Yang, I., & Yang, T. (2016). Peer group effect in firm cash holding policy: Evidence from Korean manufacturing firms. Asia-Paciﬁc Journal of Financial Studies, 45(4), 535–573. DOI: https://doi.org/10.1111/ajfs.12138
Kaustia, M., & Rantala, V. (2015). Social learning and corporate peer effects. Journal of Financial Economics, 117(3), 653-669. DOI: https://doi.org/10.1016/j.jfineco.2015.06.006
Leary, M. T., & Roberts, M. R. (2014). Do Peer Firms Affect Corporate Financial Policy? The Journal of Finance, 69(1), 139–178. DOI: https://doi.org/10.1111/jofi.12094
Lee, C.-C., Lee, C.-C., Zeng, J.-H., & Hsu, Y.-L. (2017). Peer bank behavior, economic policy uncertainty, and leverage decision of financial institutions. Journal of Financial Stability, 30, 79-91. DOI: https://doi.org/10.1016/j.jfs.2017.04.004
Lieberman, M. B., & Asaba, S. (2006). Why do firms imitate each other? Academy of Management Review, 31(2), 366–385. DOI: https://doi.org/10.5465/amr.2006.20208686
Liu, S., & Wu, D. (2016). Competing by conducting good deeds: The peer effect of corporate social responsibility. Finance Research Letters, 16, 47-54. DOI: https://doi.org/10.1016/j.frl.2015.10.013
MacKay, P., & Phillips, G. M. (2005). How does industry affect firm financial structure? The Review of Financial Studies, 18(4), 1433-1466. DOI: https://doi.org/10.1093/rfs/hhi032
Malik, M., Mamun, M. A., & Amin, A. (2018). Peer pressure, CSR spending, and long-term financial performance. Asia-Pacific Journal of Accounting & Economics, 1-20.
Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. The Journal of Finance, 60(6), 2661–2700. DOI: https://doi.org/10.1111/j.1540-6261.2005.00813.x
Manski, C. F. (1993). Identification of endogenous social effects: The reflection problem. The Review of Economic Studies, 60(3), 531-542. DOI: https://doi.org/10.2307/2298123
Maquieira, C. P., Preve, L. A., & Sarria-Allende, V. (2012). Theory and practice of corporate finance: Evidence and distinctive features in Latin America. Emerging Markets Review, 13(2), 118–148. DOI: https://doi.org/10.1016/j.ememar.2011.11.001
Maté-Sánchez-Val, M., López-Hernández, F., & Mur-Lacambra, J. (2017). How do neighboring peer companies influence SMEs’ financial behavior? Economic Modelling, 63, 104-114. DOI: https://doi.org/10.1016/j.econmod.2017.01.023
Ozoguz, A., & Rebello, M. J. (2013). Information, competition, and investment sensitivity to peer stock prices. University of Texas at Dallas.
Park, K., Yang, I., & Yang, T. (2017). The peer-firm effect on firm’s investment decisions. North American Journal of Economics and Finance, 40, 178–199. DOI: https://doi.org/10.1016/j.najef.2017.03.001
Rajan, R. G. (1994). Why bank credit policies fluctuate: A theory and some Evidence. The Quarterly Journal of Economics, 109(2), 399-441. DOI: https://doi.org/10.2307/2118468
Rauh, J. D., & Sufi, A. (2012). Explaining corporate capital structure: Product markets, leases, and asset similarity. Review of Finance, 16(1), 115-155. DOI: https://doi.org/10.1093/rof/rfr023
Shroff, N., Verdi, R. S., & Yost, B. P. (2017). When does the peer information environment matter? Journal of Accounting and Economics, 64(2-3), 183-214. DOI: https://doi.org/10.1016/j.jacceco.2017.03.005
Shue, K. (2013). Executive networks and firm policies: Evidence from the random assignment of MBA peers. The Review of Financial Studies, 26(6), 1401-1442. DOI: https://doi.org/10.1093/rfs/hht019
Smith, D. j., Chen, J., & Anderson, H. D. (2015). The influence of firm financial position and industry characteristics on capital structure adjustment. Accounting & Finance, 55(4), 1135–1169. DOI: https://doi.org/10.1111/acfi.12083
Valta, P. (2012). Competition and the cost of debt. Journal of Financial Economics, 105(3), 661–682. DOI: https://doi.org/10.1016/j.jfineco.2012.04.004
Williams, J. T. (1995). Financial and industrial structure with agency. The Review of Financial Studies, 8(2), 431-474. DOI: https://doi.org/10.1093/rfs/8.2.431
Copyright (c) 2019 Isma Zaighum, Mohd Zaini Abd Karim, Dr
This work is licensed under a Creative Commons Attribution 4.0 International License.