Peer Effects in Investment: Evidence from Early-tenure CEOs

Abstract

This study examines whether Chief Executive Officers' (CEOs) incentives to rely on peers' investments vary over their tenure at a firm. Newly appointed CEOs (hereinafter 'early-tenure CEOs') often encounter a lack of firm-specific information and are subject to rigorous evaluation. Therefore, when making investment decisions, they tend to seek more efficient and readily accessible external information, such as investment decisions made by peer firms. We find that the positive association between a focal firm's investments and those of its peers (termed 'peer effects') is stronger when early-tenure CEOs manage the focal firm. Furthermore, this peer effect is stronger when managers possess greater incentives to rely on peers (i.e., lower ability and stronger monitoring) or when firms' investment information quality is poorer (i.e., early stage of their life cycle, greater investment volatility and uncertainty). We also find that geographic proximity and the sharing of common board members or auditors may serve as mechanisms facilitating peer effects. Finally, we document improved future performance for early-tenure CEOs who align their investment decisions with those of peers. This study contributes to the existing literature by illustrating that manager-level characteristics can influence heterogeneity of peer effects and underscores the benefits of peer effects.