Do Intra-industry Peer Effects Influence the Debt Financing Policy of Companies Listed in Thailand?

Abstract

Rational imitation of financial policies, namely peer effects, was documented to prevail among firms within an industry in both developed and top emerging economies. Lacking evidence from medium-sized emerging Asian countries, this study examined intra-industry peer effects, i.e., imitation, on debt financing at Thai listed companies. The sample consisting of the firms listed on the Stock Exchange of Thailand (SET) during the years 2001–2018 was incorporated to discover those effects. Numerous databases associated with the SET (e.g., SETSMART) and the firms’ websites were used to collect financial numbers. With 6,058 firm-year observations, unbalanced panel data was then analyzed by using the random-effects and fixed-effects ordinary least squares models as well as the two-stage least squares regression. The main findings show that a focal firm imitates the long-term debt financing of its industry peers. Using the instrument approach to address endogeneity, the key results are confirmed. Peers’ equity shock as the instrumental variable decreases their financing with debt, subsequently lowering debt levels at a focal firm. This mimicking was operated through peer action, not peer character, i.e., performance. In additional tests, severe market competition was found to strengthen the uniformity of decision-making on debt finance among industry peers. Meanwhile, the high cost of information embedded in innovation-driven businesses has not been found to both promote and reduce peer effects on debt finance. Including the extra control variables at firm-specific levels, the key results remain robust. This study highlights a vein of social learning theory and competition-based theory in discussing herding behaviors toward all member firms in a certain industry. The conclusions enrich the literature on peer effects on debt finance policy.