Do Peer Firms Affect Corporate Financial Policy?

Transcription

1 1 / 23 Do Peer Firms Affect Corporate Financial Policy? Journal of Finance, 2014 Mark T. Leary 1 and Michael R. Roberts 2 1 Olin Business School Washington University 2 The Wharton School University of Pennsylvania BCG Lab Seminar, 18 April 2014

2 2 / 23 Background Most research on corporate financial policy assumes capital structure is indenpendent of peer firms. Evidence suggests that CFOs care peer firms financing decisions in survey. 1 Average leverage ratios determine capital structures. 2 1 Graham and Harvey (2001) 2 Welch (2004), MacKay and Philips (2005), Frank and Goyal (2009)

3 3 / 23 Research Questions This paper identifies whether, how, and why Peer firm behavior matters for capital structure. How can the reflection problem 3 be solved? How can the endogenous selection be overcomed? How can two channels be distinguished? Action or characteristics? 3 Manski (1993)

4 4 / 23 Main Findings Firms capital structures are influenced by their peers. Peer firms actions affect more than their characteristics. Managers learn from leading companies.

5 5 / 23 I. Data and Summary Statistics Data The merged CRSP-Compustat database , 44 years. 9,126 firms. 217 industry (3-digit SIC). 80,279 firm-year observations. Winsorization at 1st and 99th percentiles.

6 6 / 23 I. Data and Summary Statistics Tab1. Summary Statistics

7 II. The Empirical Model Model Specification From the empirical capital structure literature 4, y ijt = α + βȳ ijt + γ X ijt 1 + λ X ijt 1 + δ µ j + φ ν t + ɛ ijt (1) y ijt leverage. ȳ ijt peer firm average outcomes excluding itself. X ijt 1 peer firm average characteristics 1 year before. X ijt 1 firm-specific characteristics 1 year before. Industry and year fixed effects are considered. 5 4 Rajan and Zingales (1995), Frank and Goyal (2009) 5 Petersen (2009) 7 / 23

8 8 / 23 II. The Empirical Model Note on Capital Structure Dependent variables: Book leverage (debt / assets) Market leverage (debt / debt + market value of equity). Commonly accepted determinants: Tangibility (property, plant and equipment / assets) Growth opportunity (market-to-book ratio) Firm size (log of sales) Profitability (EBITDA / assets).

9 9 / 23 III. Identification A. The Identification Problem The Reduced-Form Model The reduced-form of equation (1) is 6 E(y X, µ j ) = α + γ E(X µ j ) + δ µ j + λ X (2) where γ = ( ) βλ + γ 1 β If γ 0, then β or γ 0. i.e., the peer effects are significant. 6 Manski (1993)

10 III. Identification B. The Identification Strategy Exogenous Peer Firm Characteristic Lagged idiosyncratic variation in stock return. Available for a broad panel of firms. Relevently free from manipulation. Impounding many value-relevant events. Focused on a vast asset pricing literature already. Showed a strong correlation with capital structure. 7 7 Marsh (1982), Loughran and Ritter (1995), Baker and Wurgler (2002), Welch (2004) 10 / 23

11 11 / 23 III. Identification C. Construction of the Return Shock The Estimation of Return Shocks Following augmented market model is used: r ijt = α ijt + β M ijt (r Mt r ft ) + β IND ijt ( r ijt r ft ) + η ijt (3) A rolling annual basis using monthly returns months of data. ˆη ijt = r ijt ˆr ijt idiosyncratic return.

12 12 / 23 III. Identification C. Construction of the Return Shock Tab2. Stock Return Factor Regression Results η ijt annually compounded idiosyncratic return.

13 13 / 23 III. Identification D. Identification Threats Tab3. Peer Firm Return Shock Properties

14 Tab4. Peer Effects: Reduced-Form Estimates PanA. Financial Policy

15 15 / 23 IV. The Role and Implications of Peer Effects C. Customer-Supplier Links Different Approach for Peer Groups Ind. j Customer A 8 3 Customer B Firm i Peer Non-peer 8 Cohen and Frazzini (2008)

16 Tab5. Customer-Supplier Tests PanA. Customer Return Shocks

17 17 / 23 IV. The Role and Implications of Peer Effects D. Peer Effects Channels: Actions versus Characteristics Tab6. Leverage Changes by Peer Firm

18 V. Why Do Firms Mimic One Another? A. Theoretical Motivation Potential Mechanisms behind Peer Effects Market competition. 9 Rational herding models. 10 Free-riding in information acquisition or evaluation. 11 To infer best choice from peer companies Bolton and Scharfstein (1990), Chevalier and Scharfstein (1996) 10 Devenow and Welch (1996) 11 Zeckhauser, Patel, and Hendricks (1991) 12 Devenow and Welch (1996) 18 / 23

19 19 / 23 V. Why Do Firms Mimic One Another? B. Empirical Results Tab9. Which Firms Mimic?

20 20 / 23 V. Why Do Firms Mimic One Another? B. Empirical Results Tab10. Which Firms Are Mimicked?

21 21 / 23 VI. Conclusion Implication and Further Studies Peer firms are determinants of capital structure. The decision (action) of peer firms are important. The characteristics also matter, to a lesser extent. Learning and reputational concerns are motives. Mimicking behavior among Small, young, unsuccessful and financially constrained firms. Following firms. Whether the mimicking is optimal? How can we model the capital structure with interactions?

22 22 / 23 VI. Conclusion Discussion