Do Firms Imitate: The Moderating Role of Ownership Concentration in Relation Between Peer Effect and Corporate Financial Policies
Peer firms play very important role in shaping corporate financial policies. The widespread corporate finance literature endorses the impact of peer firms in making firms’ financial decisions. Seeing its importance in the corporate world, the current study intends to comprehensively analyze the impact of peer firms on corporate financial policies specifically capital structure, dividend as well as investment policies in the context of Pakistan. In addition to this, the study also intends to capture underlying motive of this mimicking behavior of Pakistani firms. For this purpose the study attempts to investigate either small firms who mimic their large, profitable rivals either also successful in capturing same financial performance or not. Lastly, the ownership composition of Pakistani firm is concentrated. Keeping in view the importance associated with composition of ownership in the governance matters of Pakistani firms the study also strives to explore the moderating role of ownership concentration in relation between peer effect and all three corporate financial policies.
The capturing of peer effect in the presence of reflection problem (endogeneity) is not possible. Since, it is difficult to infer either firm’s actions are attributed to peer firms’ actions and/or characteristics. To address this issue of endogeneity, the study utilized generalized method of moments (GMM) to inspect the relation between peer effect and corporate financial policies. In order to check the underlying motive of mimicking behavior of small versus large firms, propensity score matching (PSM) was carried out. Lastly, moderation analysis was conducted to analyze the moderating role of ownership concentration in relation between peer effect and three financial policies (capital structure, dividend and investment).
The results of current study confirm the role of peers while devising corporate leverage as well as investment policies. This signifies that Pakistani firms do not set their policies in isolation. Corporate managers considers what their peers are doing in this regard. In addition to this, the study results depict insignificant relation between peer effect and corporate dividend policy. It means the firms of Pakistan do not considers peers’ information, actions or characteristics while deciding about their own dividend payment decisions. Results relating to firms who mimic peer firms either also bring same financial performance or not also confirm the fulfillment of this underlying objective. In all measurements of performance the small firms remain successful in achieving this motive of them.
Lastly, the findings of the current study produce somewhat mixed results relating to moderating role of ownership concentration in relation between peer effect and corporate financial policies (leverage, dividend and investment policies). Relating to moderating role of ownership concentration in relation between peer effect and corporate leverage as well as investment policies, the results depict insignificant connection indicating no moderating role of ownership concentration. While, the findings of current study confirm significantly negative moderating role of ownership concentration in relation between peer effect and dividend policy of the firm. The theoretical as well practical implications are discussed.