Peer Effects in Corporate Governance

Abstract

Using data on antitakeover provisions and headquarter location for a large sample of U.S. public corporations, this paper documents robust evidence of peer effects in corporate governance. In particular, we have two sets of findings: 1) good governance breeds good governance - i.e., firms are less likely to adopt antitakeover provisions if fewer of their peers adopt them; 2) good governance matters the most when peers have good governance - i.e., the negative effect of antitakeover provisions on corporate performance and investment, financial, organizational, and CEO compensation policies is concentrated in areas with low incidence of antitakeover provisions. A further contribution of the paper is to develop a novel triple-difference estimator that addresses causality by exploiting exogenous variation in peer governance generated by state adoption of antitakeover laws. Our results suggest that in order to understand the governance-performance relationship the literature needs to go beyond the standard single-firm assumption.