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Do Peer Firms Affect Corporate Financial Policy?




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    • Leary is with Olin Business School, Washington University in St. Louis, and Roberts is with The Wharton School, University of Pennsylvania and NBER. We thank Andy Abel, Ulf Axelson, Daniel Bergstresser, Philip Bond, Murray Frank, Ken French, Itay Goldstein, Robin Greenwood, Richard Kihlstrom, Jiro Kondo, Arvind Krishnamurthy, Camelia Kuhnen, Doron Levit, Ulrike Malmendier, David Matsa, Atif Mian, Toby Moskowitz, Francisco Perez-Gonzalez, Mitchell Petersen, Gordon Phillips, Nick Roussanov, Ken Singleton, and Moto Yogo, as well as conference and seminar participants at the NBER Fall Corporate Finance Meeting, Minnesota Corporate Finance Conference, University of Washington Summer Finance Conference, Western Finance Association Meeting, Columbia University, Cornell University, Harvard Business School, Notre Dame University, Pennsylvania State University, Purdue University, Rice University, Stanford University, Temple University, University of British Columbia, University of California Berkeley, University of Kentucky, University of Maryland, University of Pennsylvania, University of Rochester, University of Southern California, and Washington University in St. Louis. Roberts gratefully acknowledges financial support from a Rodney L. White Grant.


We show that peer firms play an important role in determining corporate capital structures and financial policies. In large part, firms' financing decisions are responses to the financing decisions and, to a lesser extent, the characteristics of peer firms. These peer effects are more important for capital structure determination than most previously identified determinants. Furthermore, smaller, less successful firms are highly sensitive to their larger, more successful peers, but not vice versa. We also quantify the externalities generated by peer effects, which can amplify the impact of changes in exogenous determinants on leverage by over 70%.