Peer Effects in Financial Decision Making: A Literature Review and Future Research Outlook

Zhang Tianyu; Zhong Tianli

doi:doi:10.16538/j.cnki.fem.2018.11.001

Summary

This paper firstly introduces three possible theoretical mechanisms though which peer effects of corporate financial decisions might arise, namely preference interactions, expectation interactions and action choices constraint interactions. Preference interactions suggest that peer effects are essentially the continuously repeating best response interplay among interest pertaining parties, with each unit targeting at maximizing his/her own utility. Under the framework of expectation interactions, peers’ actions will help to shape decision makers’ expectation of a specific decision and thus influence final realization. Motivations, informational transfer channels and the consequence of information-based peer effects have been studied. Action choices constraint interactions can also explain peer effects when action based negative or positive spillover effects play a role. These theories provide us with deep understandings of different types of peer effects under different assumptions.　　Secondly, we systematically summarize extant empirical literature according to " whether peer effects exist in the process of financial decision making” and " what are the possible driving mechanisms behind peer effects in financial decisions”. To be specific, we summarize the literature according to the reference group, which can be industry/product market, geographic neighborhood, social network, conglomeration, and experiment or statistically matching based group.　　Furthermore, we offer detailed descriptions of several types of identification empirical models, potential endogeneity problems and corresponding solutions, which are unique to the peer effect research. With different reasoning, indirect identification methods focus on some tractable characteristics of peer effects and make the judgment based on comparison between theoretical predication and real data realization. Then, advantages and disadvantages for both methodologies are summarized.　　Lastly, this review proposes a research framework. This framework not only integrates all three carefully elaborated elements in a cohesive way, but also embeds the idea of peer effects into the corporate finance paradigm, together with the traditional research viewpoint. Therefore, the theoretical and practical significance of peer effects are highlighted in this framework. Although the pursuit of this research question is still at a fledgling stage, some great progresses have been made with respect to research contents and methodology refinements. Finally, we demonstrate some promising future research questions. In conclusion, we hope that this paper could be beneficial to Chinese scholars who are willing to dig into this interesting research topic.