Peer Effects on Capital Structure Decisions: Empirical Evidence from Selected Listed Companies of DSE

Abstract

In the dynamic landscape of corporate finance, the effect of social dynamics on decision-making processes is a subject that deserves closer examination. This study attempts to capture effects of peer firms on capital structure decisions on listed firms of DSE from Food & Allied, Power & Fuel, Cement and Ceramic sectors during 2014-15 to 2021-22. We have used industry median leverage to measure peer firm’s capital structure decision. Results of Fixed effects model using a panel of 280 firm-year data suggest absence of peers’ effects on capital structure decisions of firm. The key variable of interest – industry median Total Debt ratio (TDR), Short term debt ratio (STDR) and long term debt ratio (LTDR) ratio have positive but statistically insignificant effects on firm’s TDR, STDR and LTDR respectively. Consequently, this study rejects the peers’ influence on capital structure decisions, concluding that capital structure is independent of peer dynamics. The finding further reveals cash generating efficiency and liquidity to be negatively associated with leverage. Asset growth rate exhibits significant positive association with leverage. Firms possessing more tangible assets prefer long term debt. Debt servicing capacity has significant positive effects on STDR. Total assets growth rate is positively associated with debt. The findings suggest that Bangladeshi managers emphasize on firm-specific aspects when making capital structure decisions. They should prioritize the firm’s strengths, opportunities, risks, weaknesses, conditions, and strategy over peer decisions.