Peer Effect on Payout Decisions: The Moderating Role of Institutional Shareholdings and Agency Problems

Neeraj Jain, Smita Kashiramka and Neeru Chaudhry
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Neeraj Jain: Great Lakes Institute of Management, Chennai, Tamil Nadu, India
Smita Kashiramka: Indian Institute of Technology, Delhi, Delhi, India
Neeru Chaudhry: Indian Institute of Technology, Delhi, Delhi, India

American Business Review, 2026, vol. 29, issue 1, 175-202

Abstract: This study examines the impact of institutional shareholders (ISH) and agency problems on firms' mimicking behavior in corporate payout policies. Using data from all companies listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) between 1996 and 2020, we employ a two-stage least squares regression approach to address endogeneity bias. The study reveals non-linear, inverted U-shaped effects of ISH on firms' mimicking behavior. At low levels of institutional holdings, firms mimic to retain the ISH. However, beyond a certain level, the active role of institutional investors in firms' decision-making reduces firms' incentives to mimic their peers' payout policies, thereby supporting the monitoring hypothesis. Furthermore, the study finds more pronounced effects of peers amongst firms with higher agency costs, reflecting managers' efforts to alleviate mistrust between shareholders and themselves. In additional analysis, our results confirm the superior value and performance of mimicking firms compared to non-mimicking firms. This study provides valuable insights into the motives driving firms' mimicking behavior.

Keywords: Dividends; Peer Effects; Institutional Shareholders; Agency Problem; Endogeneity (search for similar items in EconPapers)
JEL-codes: C40 G23 G35 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ambsrv:022662

DOI: 10.37625/abr.29.1.175-202

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