Peer Effects in Capital Structure Adjustments

This study investigates whether there are “peer effects” in capital structure adjustments using an instrumental variable (IV) approach proposed by Leary and Roberts (2014, Journal of Finance). This study finds that firms refer to peer firms’ decisions and characteristics in setting target leverage ratios and in adjusting their leverage toward their leverage targets. This study also finds evidence for “asymmetric” peer effects for over-levered and under-levered firms: (i) over-levered firms increase the speed of the adjustment when adverse equity shocks happen to their peers, while under-levered firms do so when there are positive equity shocks to their peers; (ii) peer effects regarding leverage adjustment speeds are more significant for over-levered firms than for under-levered firms.