The peer-firm effect on firm's investment decisions

This study investigates the effect of peer firms on firm investment strategies. We test the peer group effect hypothesis along differing levels of financially constrained firms as well as differing degrees of industry competition. Using idiosyncratic equity returns as the instrument variable, we use 2-stage least squares regression to identify the influence of peer firms' investment decisions on a firm's own investment policies. Our analyses empirically confirm that there is a peer group effect in making firm investment decisions. More financially constrained firms show greater dependency on peers' investment decisions. Tests of peer sensitivity to the increase in industrial competition, however, displayed a U-shaped quadratic curve, which shows that firms have the lowest peer group effect in medium-competition markets. We claim that imitative behavior in investment is presumably weak in the mid-competition market because firms are yet to be distinguished in this market. (C) 2017 Elsevier Inc. All rights reserved.
Publisher
ELSEVIER SCIENCE INC
Issue Date
2017-04
Language
English
Keywords

CAPITAL STRUCTURE; STOCK RETURNS; MARKET; PRICES

Citation

NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE, v.40, pp.178 - 199

ISSN
1062-9408
DOI
10.1016/j.najef.2017.03.001
URI
http://hdl.handle.net/10203/223782
Appears in Collection
RIMS Journal Papers
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