Self-disclosed peer effects on corporate capital structure

Abstract

• New approach to assessing the impact of peers on corporate capital structure. • Use actual company peer disclosures to create a directed network. • The approach recognizes that firms’ lines of business and peers change through time. • Robust peer effects are found when rivals share at least one customer with the firm. We study a network of interconnected firms and examine the impact of the firm’s business relationships with peers, rivals, and customers on its capital structure. Peer effect models commonly define peers based on three- or four-digit Standard Industrial Classification (SIC) codes. This renders them susceptible to measurement error and identification problems. These issues are of consequence, since we show that: a) many firms change industry affiliations over time and b) over one-half of peers revealed by managers to shareholders in a given year reside in industries that differ from the firm’s static of historical SIC code. We find that peer effects on financial policy are robust when the firm’s revealed peer group consists of self-disclosed rivals that share at least one customer with the firm in a two-year time window.