The institutional determinants of peer effects on corporate cash holdings

Analysing a large firm-level dataset from 47 countries, we document robust and significant positive peer effects on cash holdings. Specifically, a firm increases cash holdings, on average, by 5%-7% in response to a one standard deviation increase in peer firms' cash holdings. However, this response is heterogeneous - being relatively higher in countries with well-developed legal systems, higher national governance quality and more developed capital markets. These findings are consistent with rivalry-based motives of mimicking, where firms mimic to stay abreast or ahead of rivals in increasingly competitive product markets. We further find that mimicking is not a sub-optimal strategy per se, as it is beneficial in good economic states but less beneficial or distracting in bad economic states. Our findings are important as peer effects not only have real implications at the firm level but could potentially attenuate or amplify firm-specific shocks within and across industries and countries, more so, with increased globalisation and economic intergration.