A Study To The Peer Effect Among Capital Structures Of China's Listed Firms

Peer effect among capital structures refers to a phenomenone that a firm's capital structure is significantly affected by those of its peers in the same industry. In this paper, I focus on the listed firms in China's A-share market and try to provide an insight into the peer effect among firms in industries. Different from simply using industry average leverge as a capital structure determinat in the past studies, this paper successfully and precisely identify the peer effect by constructing an instrumental variable, namely equity shock.According to the empirical study in this paper, several conclusions are achieved: 1.Peer effect plays an important role in determining corporate capital structures and these peer effects are more important for capital structure determination than most previously identified determinants. 2.In large part, firms' capital structures are responses to those of their peers and, to a lesser extent, the characteristics of peer firms. 3.Quantitative analysis is done to spillover effect generated by peer effects in this paper and it turns out that the impact of changes in exogenous determinants on leverage is amplified over 54% in the case of smaller industries. 4.Smaller, less successful firms' capital structures are highly sensitive to those of their larger, more successful peers, but not vice versa.This paper provides inspiration to the development of China's listed firms capital structures theory, and moreover, financial decisions theory. It points that the CEOs of China's listed firms don't determine the capital structures isolatedly, but lay much emphasis on their peer firms' capital structures, which inpires future capital structure works on understanding the mechanisms driving the strong interdependencies among financial policies.