The Recognition of Capital Structure Peer Effect of Chinese Listed Companies

Abstract

The capital structure of listed companies is significantly affected by that of peer companies in the same industry. This phenomenon is called the peer effect of capital structure. This paper studies the peer effect of capital structures of listed companies in the same industry in the Chinese A-share market. Unlike previous literatures simply using the average industry capital structure as the explanatory variable, by constructing the instrumental variable (equity shock), this paper successfully and accurately identifies the peer effect. Through the empirical analysis, this paper has found the following conclusions: 1. The peer effect’s ability to explain the capital structure of the company itself is more important than the common capital structure influence factors in the previous literatures; 2. Peer firms play an important role for the company’s own capital structure. Specifically, the company’s own capital structure will respond to the capital structures of peer firms, rather than other financial characteristics of peer firms. The conclusion of this paper has certain enlightenment significance on the capital structure theory and capital decision-making behaviors of Chinese listed companies. The capital structure of listed companies in China is not independently decided by the company managers, but in the process of decision-making the capital structures of peer firms is considered as the important reference factor. This will provide a new angle for the research on capital structure. The strong correlation among capital decision-making of peer firms will be considered.