Local Peer Effects and Corporate Investment

Finance

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Abstract:

In this paper, we explore how local firms' investment behavior affects the investment of local peer and non-peer firms. Economic theory yields ambiguous predictions regarding the direction of (peer) firm effects and we find in OLS regressions that firms exhibit a positive effect on local peer firms' investment. We use the state-specific timing of increases in U.S.states' corporate income tax as an instrument for firm investment. Contrary to OLS findings, we find in 2SLS regressions that firms exhibit a negative and strong effect on other firms investment behavior. Reduced form analyses confirm this pattern and indicate that firms boost investment when their neighboring states increase corporate tax rates.