The peer-firm effect on firm’s investment decisions

Kwangho Park, Insun Yang and Taeyong Yang

The North American Journal of Economics and Finance, 2017, vol. 40, issue C, 178-199

Abstract: 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.

Keywords: Investment; Financial constraint; Risk averseness; Peer firm effect; U-shaped curve (search for similar items in EconPapers)
JEL-codes: G30 G32 O30 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:40:y:2017:i:c:p:178-199

DOI: 10.1016/j.najef.2017.03.001

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