Corporate Governance and Financial Peer Effects. Issue 1 (4th February 2019)

• Record Type: Journal Article
• Authors: Fairhurst, Douglas (DJ); Nam, Yoonsoo
• Is Part Of: Financial management. Volume 49:Issue 1(2020:Spring)
• Page Start: 235
• Page End: 263
• Publication Date: 2019-02-04
• Subjects: Corporations -- Finance -- Periodicals; 658.1505
• DOI: 10.1111/fima.12240
• Languages: English
• ISSNs: 0046-3892

Abstract

Abstract: Growing evidence suggests that managers select financial policies partially by mimicking policies of peer firms. We find that these peer effects in capital structure choice are unique to firms operating under weak external corporate governance. Cross‐sectional tests suggest that this finding is best explained by a quiet life hypothesis in which managers may be able to avoid the effort required to optimize financial policies and the scrutiny of market participants. Leverage ratios of mimicking firms display less sensitivity to a profitability shock. Finally, mimicking correlates to higher financing costs and lower future profitability, especially if it results in high leverage.