Abstract: We examine how the peer effects arising not only from the leading firm but also from a slightly better performing firm affect the capital structure decisions of a firm. There is a large body of literature documenting the importance of peer effects, but it is unclear whether managers pay close attention to activities of slightly better performers. This study uses both book- and market-value based approaches to estimate the peer effect measures. Our analysis shows that: (1) our peer effect measures induce the convergence of the follower firms' capital structure towards better performing firms; and (2) the capital structure converges more towards a slightly better performer.

Keywords: capital structure policy; imitation; mimicking; peer effects