How Corporate Governance Affects Mimicking Peers’ Financial Decisions

Traditional explanations for why companies choose certain financial policies focus on firm-specific factors. For instance, all else being equal, firms with higher tax rates are likely to favor debt financing over equity financing, given the tax advantages of debt. However, growing evidence suggests that firms also take cues from their peers in selecting financial policies. Yet, it is unclear whether this approach is consistent with maximizing shareholder interests.

In a recent study, we examine the impact of firms’ external corporate governance environments on the propensity of firms to mimic their industry peers in the selection of financial policies. Managers of … Read more