Research On The Motivation Of The Peer Effect Of Corporate Investment

Under the association between enterprises at the beginning of this century,the mutual influence and learning between the enterprises are called the peer effect which is gradually focused by the economists.Comparing to the conventional corporate finance hypothesis,the enterprise is not an independent subject and its behavior decisions can be influenced by other enterprises.Indeed,the influence of the peer effect is heavier than the firms' financial status.Therefore,it is very meaningful to study the existence,motivations,affecting factors and economic consequences of the peer effect for developing the research of the corporate decisionmaking.According to the existing literature,scholars pay more attention to the research in following three directions.Firstly,the research on the existence of the peer effect.For example,the peer effect has been found to be significant in the capital structure management,investment policy,payout policy,earning management and cash holding.Secondly,the research on the affecting factors of the peer effect,such as the industry competition,financial constraint and policy uncertainty.Thirdly,the research on the economic consequences of the peer effect.Taking the corporate investment decision as an example,in spite of the imitation can shortly bring some benefits like saving the decision costs,maintaining the managers' reputation,attracting the investors' attention and acquiring the policy welfare.However,in the long term,both the managers' motivation and the economic policies will lead to excessive peer effect of the investment decision,which will further result in the over-investment for the enterprises,the overcapacity in the industries and the reduction in the efficiency of social resources allocation.Hence,it is significant to restrain the peer effect for maintaining the healthy development of the enterprises,the industries and the macro economy.Based on the above analysis,it is ultimately important to study the motivation of the peer effect in order to originally restrain the generation of the peer effect and avoid the negative consequences.By contrast,the existing literature about the motivation is only theoretical and the related quantitative research is rare.This situation results in helplessness to provide the practical suggestions refraining the peer effect in corporate investment.Given this,this article starts from the classical theoretical research to investigate the internal and external motivation of the peer effect in corporate investment based on the rational herding theory,the information-based theory,the competitive-based theory,the signaling theory and the institutional theory.To complete this task,this article investigates the motivation and the generating mechanism of the peer effect from different aspects of the information acquisition,the career concern,the signal transmission and the economic policies.By using the A-share listed enterprises in China as the sample,this article conducts the following work and get the following conclusions.Firstly,in the dimension of information acquisition.This article uses managers' social network and information channel as the measures of their ability to acquire information.By using two-stage least squares model(2SLS)with the data of A-share listed enterprises from 2008 to 2018,this article finds that the managers lack enough ability of information acquisition resulting in the peer effect in corporate investment:(1)There are significant peer effect in the investment decisions of Chinese listed companies,and the managers concern more on the peers' behaviors rather than their financial status.(2)Social network is positively correlated with the managers' ability of information acquisition.For the managers with no social network,they have no chances to imitate their peers.On the contrary,the managers with social network have the motivation to imitate their peers.(3)The level of the managers' social network can refrain the peer effect significantly.For the managers with lower social network,private information is expensive,so they imitate their peers because of lacking enough private information.(4)The managers' information channels can also refrain the peer effect.Further,compared with the chairman,the CEOs' information channels are more efficient to reduce the peer effect.Secondly,in the dimension of career concern.This article uses the managers' age,tenure and performance pressure as the measure of their career concerns.By using two-stage least squares model with the data of A-share listed enterprises from 2008 to 2018,this article finds that the managers' motivation maintaining their reputation results in the peer effect in corporate investment:(1)The magnitude of career concern is not the direct cause of the peer effect.The younger managers have more career concern but imitate their peers less while the older managers have less career concern but imitate their peers more.(2)The type of career concern is the direct cause of the peer effect in corporate investment.The managers' career concern can be divided into building reputation or maintaining reputation.Only the managers who want to maintain their reputation have strong motivation to imitate their peers.(3)The managers who is new appointed prefer to build reputation,so they have weak motivation to imitate their peers.(4)The managers who have less performance pressure prefer to maintain reputation,so they have stronger motivation to imitate their peers.Thirdly,in the dimension of signal transmission.It is widely recognized that the dividend payment is a common approach to transmit signals.Paying dividend is beneficial for the firms to decrease the external financing cost and to support the subsequent investment.This article uses event study to reveal the mechanism of signal transmission causing the peer effect in corporate investment.However,it is difficult to measure the managers' motivation of signal transmission.Thus,this article tries to demonstrate the existence and mechanism of this motivation in the aspect of investor response.This article finds that the managers imitate their peers to transmit optimistic signals to the investors,which helps the firms acquire more investors' attention:(1)There is significant peer effect in corporate dividend payment.The decisions about whether to pay,when to pay and how much to pay are affected by their peers.(2)The enterprise's payout behavior can acquire positive announcement returns.This result shows that the managers imitate their peers can also obtain the investors' attention.So,the motivation of signal transmission is reasonable.(3)If the announcement time of the firm is later than their peers,the firm's announcement returns will be lower.(4)If the firm pays more than their peers,the firm will acquire higher announcement returns.Above results show that investors prefer the firms that pay dividends earlier and more.Additionally,the investors believe those firms are more excellent than the peers.Therefore,the managers imitate their peers to show that they are extraordinary.This approach can help them attract investors' attention and reduce the cost of external financing.What's more,some managers even utilize this mechanism to transmit false signals in order to cover up their problems.Finally,in the dimension of economic policies.This article uses dummy variable to measure the influence of the policies.By using the difference-in-difference model with the data of A-share listed enterprises from2008 to 2018,this article finds that the economic policy the external cause of the peer effect in corporate investment:(1)Being affected by the economic policies,the enterprises' investment will show evident convergence.The economic policies represent the expectation of the government to the future industry and economy.Therefore,the managers believe that following the policies can obtain policy welfare.When the most firms focus on the policies,the peer effect are occurred.(2)The higher the policy level,the more significant the peer effect.Higher policy level contains high-quality information,which makes the firms' investment more convergent.(3)In the area with stronger government intervention,policies will cause more evident peer effect in corporate investment.(4)For the state-owned firms,their managers are more sensitive to the policy information.Hence,the policies will cause more significant peer effect in the state-owned firms' investment.According to above conclusions,this article provides the following suggestions to refrain the peer effect in enterprises' investment:(1)For the firms' managers,they should strengthen their social network and enrich the informational channels.Since higher ability of information acquisition makes the managers obtain the private information more efficiently,which will weaken their motivation to imitate the peers.(2)For the firms,they should establish positive performance evaluation mechanism and increase the cost of sticking to convention.This approach can prevent the managers imitating their peers to negatively invest.(3)For the investors,they shall analyze the firms' investment rationally and pay more attention to the firms' fundamentals.This approach can eliminate the managers' motivation to obtain investors' attention by imitating their peers.(4)For the government,it shall increase the pertinence of the policies to reduce the convergence in the firms' investment.Further,introducing the market competition mechanism to prevent the firms blindly following the trend.