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Industry peer effect and the maturity structure of corporate debt

Hong Kim Duong (Department of Accounting and Information Systems, University of Texas at El Paso, El Paso, Texas, USA)
Anh Duc Ngo (Department of Accountancy, Finance and Information Management, Norfolk State University, Norfolk, Virginia, USA)
Carl B. McGowan (Department of Accountancy, Finance and Information Management, Norfolk State University, Norfolk, Virginia, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 13 July 2015

2007

Abstract

Purpose

The purpose of this paper is to examine the role of industry peers in shaping firm debt maturity decisions.

Design/methodology/approach

The authors use idiosyncratic equity shocks as instruments to disentangle industry fixed and peer effects. The authors also employ a three-stage least squares regression (3SLS) model to capture the correlation among thee (short, medium, and long) debt maturity decisions.

Findings

The authors find that a one standard deviation change in peer short (medium, long) maturity debt leads to a 50 percent (37 percent, 23 percent) change in firm corresponding maturity debt and that these mimetic behaviors are statistically significant within, but not between, firm size groups. The findings also reveal that firms that mimic the short and medium (long) debt maturity structure of their peers tend to increase (decrease) firm performance as measured by profitability, return-on-assets, and stock returns.

Research limitations/implications

First, given the research design, the authors are constraint from pinpointing the exact date of the mimicking behaviors. This limitation prevents the authors from establishing the causality of the mimicking behavior and firm performance. Future research can extend the findings by solving this problem. Second, it should be interesting to address the question of whether mimicking behavior is good or bad for firm performance. The authors only compare the performance of Close Followers and Loose Followers; however, it would be more precise to compare the performance of mimicking firms with the performance of non-mimicking firms.

Originality/value

First, the findings extend the debt maturity structure literature by providing empirical evidence that an important determinant of firm debt maturity is industry peer debt maturity. Since debt maturity directly influences firm risk and performance, it is important for debt and equity holders to know how firms choose their debt maturity so that they can estimate their investment risk precisely. Second, the paper provides new empirical evidence supporting the information acquisition and principal-agent theories in demonstrating that firm performance increases when managers herd over short and medium debt maturity decisions and decreases when managers herd over long debt maturity decisions.

Keywords

Acknowledgements

The authors wish to thank two anonymous referees, Don Johnson (Editor), James N. Schneringer, Feixue Xie, Yu Liu, William B. Elliott for their suggestions. We also thank workshop participants at the American Accounting Association 2014 Conference and Financial Management Association 2014 Conference for valuable comments.

Citation

Duong, H.K., Ngo, A.D. and McGowan, C.B. (2015), "Industry peer effect and the maturity structure of corporate debt", Managerial Finance, Vol. 41 No. 7, pp. 714-733. https://doi.org/10.1108/MF-02-2014-0050

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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