IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v38y2020i3p474-493.html
   My bibliography  Save this article

The peer effect of corporate financial decisions around split share structure reform in China

Author

Listed:
  • Wei He
  • Qian Wang

Abstract

We examine the peer effects in financial decisions of Chinese listed companies for the period of 1998–2016 as well as around Split Share Structure Reform (SSSR). Consistent with the information‐based theory of learning, Chinese firms do adjust their capital structure in response to the changes in their peers’ market leverage ratios. The industries that are more competitive, with more young firms, and high leverage volatility tend to exhibit stronger peer effects. Within industries, the firms with lower market share and profits, paying no dividends, and being financially constrained mimic their peers more strongly than their counterparts. The evidence around the SSSR reveals that firms tend to follow their industry peers and leaders more closely in making financial decisions after the reform. Finally, the mimicking behavior in financial decisions enhances firm value in the long run and this finding is more evident after the reform.

Suggested Citation

  • Wei He & Qian Wang, 2020. "The peer effect of corporate financial decisions around split share structure reform in China," Review of Financial Economics, John Wiley & Sons, vol. 38(3), pages 474-493, July.
    • Handle: RePEc:wly:revfec:v:38:y:2020:i:3:p:474-493
    DOI: 10.1002/rfe.1088
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/rfe.1088
    Download Restriction: no
    File URL: https://libkey.io/10.1002/rfe.1088?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Richard Zeckhauser & Jayendu Patel & Darryll Hendricks, 1991. "Nonrational Actors and Financial Market Behavior," NBER Working Papers 3731, National Bureau of Economic Research, Inc.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Mark T. Leary & Michael R. Roberts, 2014. "Do Peer Firms Affect Corporate Financial Policy?," Journal of Finance, American Finance Association, vol. 69(1), pages 139-178, February.
    5. Ivo Welch, 2004. "Capital Structure and Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 106-131, February.
    6. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    7. He, Wei & Mukherjee, Tarun K. & Kent Baker, H., 2017. "The effect of the split share structure reform on working capital management of Chinese companies," Global Finance Journal, Elsevier, vol. 33(C), pages 27-37.
    8. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    9. Farrell, Kathleen A. & Whidbee, David A., 2003. "Impact of firm performance expectations on CEO turnover and replacement decisions," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 165-196, December.
    10. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1989. "Alternative Mechanisms for Corporate Control," American Economic Review, American Economic Association, vol. 79(4), pages 842-852, September.
    11. Grennan, Jillian, 2019. "Dividend payments as a response to peer influence," Journal of Financial Economics, Elsevier, vol. 131(3), pages 549-570.
    12. Chevalier, Judith A & Scharfstein, David S, 1996. "Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence," American Economic Review, American Economic Association, vol. 86(4), pages 703-725, September.
    13. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-479, June.
    14. Hong Zhang & Shuai Gao & Fei Yang, 2016. "Impact of split share structure reform on capital structures: empirical evidence from China’s listed companies," Applied Economics, Taylor & Francis Journals, vol. 48(13), pages 1172-1181, March.
    15. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    16. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    17. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    18. Loughran, Tim & Ritter, Jay R, 1995. "The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    19. Charles F. Manski, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 531-542.
    20. Liao, Li & Liu, Bibo & Wang, Hao, 2014. "China׳s secondary privatization: Perspectives from the Split-Share Structure Reform," Journal of Financial Economics, Elsevier, vol. 113(3), pages 500-518.
    21. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    22. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    23. Marsh, Paul, 1982. "The Choice between Equity and Debt: An Empirical Study," Journal of Finance, American Finance Association, vol. 37(1), pages 121-144, March.
    24. He, Wei & Kyaw, NyoNyo A., 2018. "Capital structure adjustment behaviors of Chinese listed companies: Evidence from the Split Share Structure Reform in China," Global Finance Journal, Elsevier, vol. 36(C), pages 14-22.
    25. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
    26. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    27. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    28. Kaustia, Markku & Rantala, Ville, 2015. "Social learning and corporate peer effects," Journal of Financial Economics, Elsevier, vol. 117(3), pages 653-669.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jiali Liu & Xinran Xie & Yu Duan & Liang Tang, 2023. "Peer effects and the mechanisms in corporate capital structure: evidence from Chinese listed firms," Oeconomia Copernicana, Institute of Economic Research, vol. 14(1), pages 295-326, March.
    2. Wei He & NyoNyo A Kyaw, 2023. "Macroeconomic risks and capital structure adjustment speed: The Chinese evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2885-2899, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wong, Kacheng & Zhao, Longkai, 2023. "Customer–supplier relationships and non-linear financial policy response," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 180-205.
    2. Gyimah, Daniel & Machokoto, Michael & Sikochi, Anywhere (Siko), 2020. "Peer influence on trade credit," Journal of Corporate Finance, Elsevier, vol. 64(C).
    3. Jiali Liu & Xinran Xie & Yu Duan & Liang Tang, 2023. "Peer effects and the mechanisms in corporate capital structure: evidence from Chinese listed firms," Oeconomia Copernicana, Institute of Economic Research, vol. 14(1), pages 295-326, March.
    4. Kayhan, Ayla & Titman, Sheridan, 2007. "Firms' histories and their capital structures," Journal of Financial Economics, Elsevier, vol. 83(1), pages 1-32, January.
    5. Grennan, Jillian, 2019. "Dividend payments as a response to peer influence," Journal of Financial Economics, Elsevier, vol. 131(3), pages 549-570.
    6. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    7. Vivien Beattie & Alan Goodacre & Sarah Jane Thomson, 2006. "Corporate Financing Decisions: UK Survey Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9‐10), pages 1402-1434, November.
    8. Liu, Yongda & Padgett, Carol & Yin, Chao, 2022. "Internal information quality and financial policy peer effects," International Review of Financial Analysis, Elsevier, vol. 84(C).
    9. Vu Tuan Chu & Trang Hanh Lam Pham, 2021. "Zero leverage and product market competition," SN Business & Economics, Springer, vol. 1(4), pages 1-18, April.
    10. Nestor Bruno & Marcelo Pedro Dabos & Fernando Andrés Grozs, 2021. "Determinantes de la estructura de capital: un survey con énfasis en Latinoamérica," Asociación Argentina de Economía Política: Working Papers 4444, Asociación Argentina de Economía Política.
    11. Drobetz, Wolfgang & Pensa, Pascal & Wöhle, Claudia B., 2004. "Kapitalstrukturtheorie in Theorie und Praxis: Ergebnisse einer Fragebogenuntersuchung," Working papers 2004/09, Faculty of Business and Economics - University of Basel.
    12. Elmina Homapour & Larry Su & Fabio Caraffini & Francisco Chiclana, 2022. "Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms," Mathematics, MDPI, vol. 10(7), pages 1-28, March.
    13. Antonczyk, Ron Christian & Salzmann, Astrid Juliane, 2014. "Overconfidence and optimism: The effect of national culture on capital structure," Research in International Business and Finance, Elsevier, vol. 31(C), pages 132-151.
    14. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    15. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
    16. Philippe GAUD & Martin HOESLI & André BENDER, 2004. "Further Evidence on Debt-Equity Choice," FAME Research Paper Series rp114, International Center for Financial Asset Management and Engineering.
    17. G. Oka Warmana & I. Ketut Rahyuda & Ida Bagus Anom Purbawangsa & Ni Luh Gede Sri Artini, 2020. "Investigating Capital Structure Speed of Adjustment (SOA) of Indonesian Companies for Corporate Value," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 21(3), pages 215-231, September.
    18. Haitham A. Al‐Zoubi & Jennifer A. O'Sullivan & Aktham I. Al‐Maghyereh & Brendan J. Lambe, 2023. "Disentangling Sentiment from Cyclicality in Firm Capital Structure," Abacus, Accounting Foundation, University of Sydney, vol. 59(2), pages 570-605, June.
    19. Paul Borochin & Jie Yang, 2016. "Options, Equity Risks, and the Value of Capital Structure Adjustments," Finance and Economics Discussion Series 2016-097, Board of Governors of the Federal Reserve System (U.S.).
    20. Wen-Hsien Tsai & Ching-Chien Yang & Jun-Der Leu & Ya-Fen Lee & Chih-Hao Yang, 2013. "An Integrated Group Decision Making Support Model for Corporate Financing Decisions," Group Decision and Negotiation, Springer, vol. 22(6), pages 1103-1127, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:38:y:2020:i:3:p:474-493. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.