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Do Peer Firms Affect Corporate Financial Policy?

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Executive Summary

The authors show that corporate financial policies are highly interdependent; firms make financing decisions in large part by responding to the financing decisions of their peers, as opposed to changes in firm-specific characteristics. They identify these peer effects with a novel instrumental variables approach that uses the lagged idiosyncratic equity shocks to peer firms as a source of exogenous variation. On average, a one standard deviation change in peer firms' leverage ratios is associated with a 9% change in own firm leverage ratios - a marginal effect that is significantly larger than that of any other observable determinant and one that is driven by interdependencies among security (i.e., debt and equity) issuance decisions.

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