Finance Critique

The purpose of this article is to analyze research about the effects of peer firm behaviors on the corporate financial policy of similar firms. There has been extensive analysis for other factors which may affect corporate financial policy making, but the influence of an organization's peer firms has been largely unstudied.

Authors note that prior studies of the factors influencing corporate financial policies have included the link between stock returns and financial policies; analysis of equity return shocks for customers of firms; and the empirical issues surrounding peer effects from observational studies. This research was motivated by a desire to investigate the previously marginalized effects of peer behaviors on the financial decisions of other peer firms.

The hypothesis tested was "whether, how and why peer firm behavior matters for corporate capital structures" (Leary & Roberts, 2014, p. 140). Data analyzed included peer financial policies, industry average leverage, and peer firm capital structure determinants. (Leary & Roberts, 2014, p. 140) Data pointed to two causes for behavior correlations: response to peers' actions or characteristics of the peer, such as profitability, risk, etc. The methodology used was to analyze return shocks on equity stock returns, and a firm's response to such, as an impetus for financial policy changes.

Results indicated that not only do peer behaviors affect financial policy decisions at other firms, but that peer behaviors are the primary affect for changes in corporate financial strategies across firms. Furthermore, smaller, less successful firms were much more influenced by the policy decisions of their larger, more successful counterparts, while the opposite was not true.

As it seems we hear more and more nowadays about shareholders being victimized by a firm’s poor financial choices, the purpose of this research is justified in that it is important for the stakeholders, stockholders, and...