Peer effects on capital structure: evidence from the Italian market

Abstract

Capital structure is a core issue in corporate finance and a recent field of research has started to explore herd behaviour in leverage decisions. In this context, the aim of this thesis is to investigate whether and how Italian firms are influenced by their industry peers in financing decision making. Nowadays, there are few and controversial contributions about this topic, thus it is relevant to conduct further researches. We analyse peer effect in financial policies both through descriptive statistics and econometric technique (Leary and Robert, 2014). First, we examine the sources of leverage variation: the analysis reveals that leverage varies more within-industry than across diverse industries. Then, we proxy for industry herd behaviour by analysing the degree and variability of within-industry leverage dispersion. The study shows that gearing dispersion levels differ significantly among industries, but they remain quite constant over time. Moreover, the research highlights that industries with low leverage dispersion levels (i.e. stronger herd behaviour) display higher size values and lower leverage, profitability and tangibility ratios compared to industries with high leverage dispersion levels. Finally, the regression result reveals that: (i) all firm’s specific determinants are significant in explaining leverage ratio (ii) industry peers seem to influence firm’s financial policy.