Peer effects, Financial Decisions and Industry Concentration

A review

  • Isma Zaighum Universiti Utara Malaysia
  • Dr. Mohd Zaini Abd Karim Othman Yeop Abdullah Graduate School of Business, University Utara Malaysia
Keywords: Peer effect, Finance, Industry Concentration, Review

Abstract

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.

Metrics

Metrics Loading ...

References

Adhikari, B. K., & Agrawal, A. (2018). Peer influence on payout policies. Journal of Corporate Finance, 48, 615-637.

Almazan, A., & Molina, C. A. (2005). Intra-industry capital structure dispersion. Journal of Economics & Management Strategy, 14(2), 263–297.

Banerjee, A. V. (1992). A simple model of herd behavior. The Quarterly Journal of Economics, 107(3), 797–817.

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.

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.

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.

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.

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.

Fairhurst, D. D., & Nam, Y. (2018). Corporate Governance and Financial Peer Effects. Financial Management. Forthcoming. doi:https://doi.org/10.1111/fima.12240

Foucault, T., & Fresard, L. (2014). Learning from peers' stock prices and corporate investment. Journal of Financial Economics, 111(3), 554–577.

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.

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.

Grennan, J. P. (2017). Dividend payments as a response to peer influence. Working Paper Series. doi: http://dx.doi.org/10.2139/ssrn.2170561

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

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.

Kaustia, M., & Rantala, V. (2015). Social learning and corporate peer effects. Journal of Financial Economics, 117(3), 653-669.

Leary, M. T., & Roberts, M. R. (2014). Do Peer Firms Affect Corporate Financial Policy? The Journal of Finance, 69(1), 139–178.

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.

Lieberman, M. B., & Asaba, S. (2006). Why do firms imitate each other? Academy of Management Review, 31(2), 366–385.

Liu, S., & Wu, D. (2016). Competing by conducting good deeds: The peer effect of corporate social responsibility. Finance Research Letters, 16, 47-54.

MacKay, P., & Phillips, G. M. (2005). How does industry affect firm financial structure? The Review of Financial Studies, 18(4), 1433-1466.

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.

Manski, C. F. (1993). Identification of endogenous social effects: The reflection problem. The Review of Economic Studies, 60(3), 531-542.

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.

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.

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.

Rajan, R. G. (1994). Why bank credit policies fluctuate: A theory and some Evidence. The Quarterly Journal of Economics, 109(2), 399-441.

Rauh, J. D., & Sufi, A. (2012). Explaining corporate capital structure: Product markets, leases, and asset similarity. Review of Finance, 16(1), 115-155.

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.

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.

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.

Valta, P. (2012). Competition and the cost of debt. Journal of Financial Economics, 105(3), 661–682.

Williams, J. T. (1995). Financial and industrial structure with agency. The Review of Financial Studies, 8(2), 431-474.

Published
2019-02-18
How to Cite
Zaighum, I., & Abd Karim, D. M. Z. (2019). Peer effects, Financial Decisions and Industry Concentration. SEISENSE Journal of Management, 2(2), 13-21. https://doi.org/10.33215/sjom.v2i2.116