Peer effects, industry concentration and capital structure: evidence from emerging market economies

Figures & data

Table 1. Sample selection process.

Sampling criteria	Sectors/firms
Listed manufacturing sectors on 14 EMEs’ stock exchanges (2000–2017)	40
Less: manufacturing sectors with less than four listed firms	37
Less: manufacturing sectors with firms for three consecutive years	02
Final sample sector	01
Listed firms in food manufacturing sector in EMEs’ (2000–2017)	269
Less: firms with missing data	108
Total final sample firms	161
Total period (years)	18

Source(s): Authors estimation.

Table 2. Descriptive statistics.

Variables	Mean	Median	SD	Max	Min	N
Peer Firm Averages
PL	0.280	0.246	0.121	0.790	0.070	1378
PFS	14.931	15.304	2.933	22.630	10.390	1378
PGR	1.269	1.179	0.685	5.611	0.393	1378
PP	0.108	0.104	0.096	0.571	−0.366	1378
PAT	0.434	0.401	0.166	1.692	0.194	1378
Firm Level Factors
FL	0.280	0.235	0.354	7.237	0.000	1378
FFS	14.930	14.894	3.501	24.924	0.000	1378
FGR	1.266	0.867	1.522	24.629	0.079	1378
FP	0.107	0.100	0.429	7.967	−11.713	1378
FAT	0.435	0.422	0.241	2.555	0.000	1378
Industry Concentration Factor
HHI	0.256	0.209	0.140	0.534	0.021	1378
Country Characteristics
INF	0.049	0.050	0.047	0.207	−0.060	1378
GDP Growth	0.033	0.042	0.037	0.111	−0.091	1378

Table 2 describes the study’s main variables. Peer firm averages represents the PL= Peer Firms Leverage; PFS= Peer Firms Size; PGR= Peer Firms Growth; PP=Peer firms Profitability; PAT= Peer Firms Asset Tangibility; FL= Firm’s Leverage; FFS= Firm’s Size; FGR= Firm’s Growth; FP= Firm’s Profitability; FAT= Firm’s Asset Tangibility; HHI= Herfindahl-Hirschman Index (measure of industry concentration); INF=Inflation; GDP growth= Gross Domestic Product Growth; N= Number of Observations. Firm leverage is the dependent variables, peer firm leverage, peer firm size, peer firm growth, peer firm profitability, and peer firm tangibility are used as variables of interest, while firm specific, and country level variables are used as control variables. HHI is the measure of industry concentration.

Source: Author’s estimation.

Table 3. Regression results for stock return factors.

Variables	Mean	Median	SD
α-t	0.0080	0.0055	0.0319
β-M	0.2914	0.2233	0.7936
β-IND	0.4484	0.3983	0.7647
Observations per regression	26	24	9
Adjusted R^2	0.1771	0.1123	0.2191
Average monthly return	0.0064	0.0000	0.1310
Expected monthly return	0.0065	0.0057	0.0687
Idiosyncratic monthly return	−0.0001	−0.0023	0.1317

Table 3 presents the averages of factor loadings, adjusted R-squares and the observations of the following augmented CAPM model.

$r_{\mathit{ijt}}$ represents the total equity return for firm i in country j over month, $\left(\mathit{r}{m}_{\mathit{jt}}-\mathit{r}{f}_t\right)$ gives excess return over market, $\left({\bar{r}}_{-\mathit{ijt}}-\mathit{r}{f}_t\right)$ represents the return excess received on an industry portfolio equally weighted eliminating firm i’s return. Moreover, above equation is calculated annually on a rolling bases using at least 24 months and at most 60 previous monthly returns. The idiosyncratic equity returns are calculated as the difference between realized and Idiosyncratic (expected) returns.

$\mathit{ExpectedRetur}{n}_{\mathit{ijlt}}$= ${\hat{r}}_{\mathit{ijt}}={\hat{\alpha }}_{\mathit{ijt}}+{\hat{\beta }}_{\mathit{ijt}}^{\mathit{M}}\left(\mathit{r}{m}_{\mathit{jt}}-\mathit{r}{f}_t\right)+{\hat{\beta }}_{\mathit{ijt}}^{\mathit{IND}}\left({\bar{r}}_{-\mathit{ijt}}-\mathit{r}{f}_t\right)$

$\mathit{IdiosyncraticRetur}{n}_{\mathit{ijt}}$= ${\hat{\eta }}_{\mathit{ijt}}=r_{\mathit{ijt}}-{\hat{r}}_{\mathit{ijt}}$

Source: Author’s estimation

Table 4. Properties of peers’ equity shock.

	Peers’ Equity Shock
	Contemporaneous independent variables	1-Period lead independent variable
Firm Level Factors
Firm Size	−0.0005	−0.0002
Firm Profitability	0.0004	0.0001
Firm Asset Tangibility	−0.0021	−0.0058**
Firm Growth	−0.0002	0.0008***
Firm equity shock	−0.0002	0.0023
Peers’ Averages
Firm Size	−0.005*	−0.0011
Profitability	0.009*	−0.011
Asset Tangibility	−0.005	−0.073**
Firm Growth	−0.001	0.0104***
Country Characteristics
Inflation	−0.048**	0.087**
GDP growth	−0.170**	0.048*
Constant	0.097*	0.027
Observations	1378	1220
R-squared	0.1437	0.1509

Table 4 presents the results of contemporaneous and one period lead regression of the peer firms average equity shock on both the firm level and industry peers average characteristics. The dependent variable is the peer firm average equity shock in years’ t and t+1, as specified in the table headings. The independent variables are measured in year t. The estimated coefficients presented in the Table 4 are Driscoll and Kraay’s robust to heteroscedasticity, autocorrelation and cross-sectional dependence. Peer firm averages are the averages of all firms except for firm i, within the same ICB (4-digit) industry in the same country and year. Statistical significance at the 10%, 5%, and 1% is denoted by *, **, and ***, respectively.

Source: Author’s estimation.

Table 5. Peer effects in capital structure policy in emerging countries: structural estimates.

	OLS	2SLS
	Firm Leverage
Peer Firms’ Averages
Equity shock	−0.595*** (−2.020)
Leverage		0.114*** (5.130)
Firm Size	0.006 (0.370)	−0.086 (−1.530)
Profitability	0.012 (0.680)	0.015*** (4.390)
Asset Tangibility	−0.100 (−1.160)	−0.008 (−0.640)
Firm Growth	−0.011* (−1.700)	0.005* (1.770)
Firm Level Factors
Equity shock	−0.087*** (−2.860)	−0.008*** (−2.760)
Firm Size	−0.001 (−0.180)	−0.015 (−0.640)
Profitability	−0.127*** (−6.890)	−0.052*** (−6.170)
Asset Tangibility	−0.008 (−0.200)	−0.002 (−0.200)
Firm Growth	0.040*** (2.660)	0.072*** (2.800)
Country Characteristics
Inflation	0.367*** (3.440)	0.008 (1.340)
GDP growth	−0.086 (−0.610)	−0.006 (−0.690)
First-Stage Instrument
Peer Firms Equity Shock		−0.009**(−2.100)
Observations	1220	1184
within R-squared	0.145	0.12
F-Stats (Prob.)	1694 (0.000)	4690 (0.00)

This table presents the results of estimating Equation (1)(1) $y_{\mathit{ijt}}=\mathit{\hspace{0.17em}}{\alpha }_0+\mathit{\hspace{0.17em}}{\alpha }_1{\bar{y}}_{-\mathit{ijt}}+\mathit{\hspace{0.17em}}{\alpha }_2{\bar{X}}_{-\mathit{ijt}-1}+\mathit{\hspace{0.17em}}{\alpha }_3{X}_{\mathit{ijt}}+{\alpha }_4{Z}_{\mathit{jt}}+\mathit{\delta }{\mu }_j+\mathit{\hspace{0.17em}}\mathit{\varphi }{\nu }_t+{\epsilon }_{\mathit{ijt}}$(1) :

$y_{\mathit{ijt}}={\alpha }_0+{\alpha }_1{\bar{y}}_{-\mathit{ijt}}+{\alpha }_2{\bar{X}}_{-\mathit{ijt}-1}+{\alpha }_3{X}_{\mathit{ijt}}+{\alpha }_4{Z}_{\mathit{jt}}+\mathit{\phi }{\eta }_j+\mathit{\delta }{\mu }_t+{\epsilon }_{\mathit{ijt}}$

The dependent variable $y_{\mathit{ijt}}$ is firm leverage mentioned in the top row. The independent focal variables ${\bar{y}}_{-\mathit{ijt}}$ and ${\bar{X}}_{-\mathit{ijt}-1}$ are the average of industry leverage ratio and the averages of peer firms’ characteristics respectively. ${\bar{X}}_{-\mathit{ijt}-1}$ and $Z_{\mathit{jt}}$ are firm specific characteristics and country level control variables, ${\eta }_j\mathit{and}{\mu }_t$ correspond to country and year fixed effects, and ${\epsilon }_{\mathit{ijt}}$ is the error term.

The table shows estimated results of OLS fixed-effects and 2SLS. The estimated coefficients (scaled by their respective standard deviations for easier interpretation) and t-statistics (in parentheses) are robust to heteroscedasticity, autocorrelation, and cross-sectional dependence. Peer firm averages are the averages of all firms except for firm i, within the same ICB (4-digit) industry in the same country and year. Peers’ averages are one period lagged with respect to the outcome variable. Statistical significance at the 10%, 5%, and 1% is denoted by *, **, and ***, respectively.

Source: Author’s estimation.

Table 6. Peer effects and industry concentration.

	Firm Leverage
	Competitive	Concentrated
Peer Firms Averages
Leverage	0.235** (2.04)	−0.341 (−0.44)
Firm Size	−0.05 (−0.340)	0.112 (0.340)
Profitability	0.029*** (2.840)	0.062 (0.550)
Asset Tangibility	−0.02 (−0.220)	−0.196 (−0.560)
Firm Growth	−0.001 (−0.090)	−0.181 (−0.530)
Firm Level Factors
Equity shock	−0.035 (−1.580)	−0.002 (−0.610)
Firm Size	−0.034 (−0.810)	0.093*** (3.130)
Profitability	−0.068*** (−5.320)	−0.208*** (−2.850)
Asset Tangibility	0.009 (0.240)	−0.032 (−0.760)
Firm Growth	0.053** (2.310)	−0.006 (−0.160)
Country Characteristics
Inflation	−0.019 (−1.580)	0.011 (0.870)
GDP growth	0.015 (0.770)	−0.011 (−1.230)
Observations	441	770
F-Stats	18.6***	89.83***

This table presents the results of estimating Equation (1)(1) $y_{\mathit{ijt}}=\mathit{\hspace{0.17em}}{\alpha }_0+\mathit{\hspace{0.17em}}{\alpha }_1{\bar{y}}_{-\mathit{ijt}}+\mathit{\hspace{0.17em}}{\alpha }_2{\bar{X}}_{-\mathit{ijt}-1}+\mathit{\hspace{0.17em}}{\alpha }_3{X}_{\mathit{ijt}}+{\alpha }_4{Z}_{\mathit{jt}}+\mathit{\delta }{\mu }_j+\mathit{\hspace{0.17em}}\mathit{\varphi }{\nu }_t+{\epsilon }_{\mathit{ijt}}$(1) :

$y_{\mathit{ijt}}={\alpha }_0+{\alpha }_1{\bar{y}}_{-\mathit{ijt}}+{\alpha }_2{\bar{X}}_{-\mathit{ijt}-1}+{\alpha }_3{X}_{\mathit{ijt}}+{\alpha }_4{Z}_{\mathit{jt}}+\mathit{\phi }{\eta }_j+\mathit{\delta }{\mu }_t+{\epsilon }_{\mathit{ijt}}$

The dependent variable $y_{\mathit{ijt}}$ is firm’s book leverage mentioned in the top row. The independent focal variables are ${\bar{y}}_{-\mathit{ijt}}$ and ${\bar{X}}_{-\mathit{ijt}-1}$ the average of industry leverage ratio and the averages of peer firms’ characteristics respectively. $X_{\mathit{ijt}}$ and $Z_{\mathit{jt}}$ are firm specific characteristics and country level control variables, ${\eta }_j\mathit{and}{\mu }_t$ correspond to country and year fixed effects, and ${\epsilon }_{\mathit{ijt}}$ is the error term.

The table shows the estimated coefficients, scaled coefficients (scaled by their respective standard deviations for easier interpretation) and t-statistics robust to heteroscedasticity, autocorrelation, and cross-sectional dependence. The dependent variable is firm leverage (debt to total assets) mentioned in the top row. Peer firm averages are the averages of all firms except for firm i, within the same ICB (4-digit) industry in the same country and year. Peer firms’ averages are one period lagged with respect to the outcome variable. Statistical significance at the 10%, 5%, and 1% is denoted by *, **, and ***, respectively.

Source: Author’s estimation.

Table 7. Robustness analysis.

	(1)	(2)	(3)
Peer firms averages
Leverage	1.04*** (5.140)	1.403*** (4.010)	0.174 (0.650)
Firm Size	−0.02 (−1.220)	−0.119* (−1.860)	−0.002 (−0.180)
Profitability	0.164*** (4.690)	0.222 (1.500)	0.034 (0.760)
Asset Tangibility	−0.046 (−0.540)	0.127 (0.590)	−0.375 (−2.360)
Firm Growth	0.008 (0.670)	0.029 (1.340)	−0.027 (−1.620)
First-Stage Instrument
Peers Average Equity Shock	−0.573** (−2.440)	−0.736** (−2.53)	−0.354*** (−3.96)
Firm Level Factors	Yes	Yes	Yes
Control Variables	Yes	Yes	Yes
Observations	1220	608	612

This table presents the robustness results of two stage least squares estimating Equation (1)(1) $y_{\mathit{ijt}}=\mathit{\hspace{0.17em}}{\alpha }_0+\mathit{\hspace{0.17em}}{\alpha }_1{\bar{y}}_{-\mathit{ijt}}+\mathit{\hspace{0.17em}}{\alpha }_2{\bar{X}}_{-\mathit{ijt}-1}+\mathit{\hspace{0.17em}}{\alpha }_3{X}_{\mathit{ijt}}+{\alpha }_4{Z}_{\mathit{jt}}+\mathit{\delta }{\mu }_j+\mathit{\hspace{0.17em}}\mathit{\varphi }{\nu }_t+{\epsilon }_{\mathit{ijt}}$(1) . For all models, firm’s book leverage is the dependent variable. Firm level factors include, firm’s equity shock, firm size, profitability, asset tangibility, and firm growth with GDP growth and inflation as control variables. In Model 1, all the data is winsorized at 1^st & 99^th percentile. Models 2 and 3 show the 2SLS results for two levels of Industry Concentration measured with HHI values below 0.15 as competitive and HHI values equal or greater than 0.15 as concentrated respectively.

The presented estimated coefficients (are scaled by their respective standard deviations for easier interpretation) and t-statistics (in parentheses) are robust to heteroscedasticity, autocorrelation, and cross-sectional dependence. Peer firm averages are the averages of all firms except for firm i, within the same ICB (4-digit) industry in the same country and year. Peer firms’ averages are one period lagged with respect to the outcome variable. Statistical significance at the 10%, 5%, and 1% is denoted by *, **, and ***, respectively.

Source: Author’s estimation.

Table

Variable	Definition		Frequency	Source
Dependent variable
Firm Leverage	Ratio of total debt-to-book value of assets.		Annual	Datastream
Firm-level variables
Firm Size	Log of Sales		Annual	Datastream
Profitability	EBITDA/Book value of assets where, EBITDA is earnings before interest, tax, depreciation and amortization		Annual	Datastream
Asset Tangibility	Net PPT/Book value of assets, where PPT is Net Plant, Property and Equipment		Annual	Datastream
Growth	Ratio of market value of Assets (market value of equity + total debt) to Book value of Total Assets		Annual	Datastream
Industry Concentration variables
HerfHirsh Index (HHI)	HHI is Herfindahl-Hirshman Index and is calculated as the sum of squares of firm’s market share in an industry. Following Hou and Robinson (2006) approach, in our main analysis we take sales as a measure of market share and for robust analysis assets are used.		Annual	Datastream
Country-level control variables
GDP growth	It is measured as the nation’s gross domestic product yearly growth		Annual	Eikon
Inflation	Its the change in prices in percentage (based on GDP deflator)		Annual	Eikon

Table B1. Sample description.

No.	Country	Firms	Firm observations
1	Brazil	13	78
2	Chile	6	96
3	Egypt	9	45
4	Greece	14	84
5	Indonesia	11	132
6	Malaysia	26	234
7	Mexico	8	136
8	Pakistan	9	90
9	Peru	4	40
10	Philippines	13	65
11	Russia	6	24
12	South Africa	6	30
13	Taiwan	20	180
14	Turkey	16	144
Total		161	1378

Table B1 presents number of firms for each country and their firm-year observations. The accounting data is extracted from the Datastream universe for the time period between 2000 and 2017 with sufficient data.

Source: Author’s estimation.

Hou, K., & Robinson, D. T. (2006). Industry concentration and average stock returns. The Journal of Finance, 61(4), 1927–1956. https://doi.org/10.1111/j.1540-6261.2006.00893.x

 Web of Science ®Google Scholar