Peer Effects in Corporate Governance Practices: Evidence from Universal Demand Laws

Firms in the same networks tend to have similar corporate governance practices. However, it is difficult to distinguish between peer effects, where governance practices propagate from one firm to another, and selection effects, where firms with similar governance preferences self-select into linked groups. Studying board-interlocked firms, we utilize a novel instrument based on staggered adoptions of universal demand laws across states to identify causal peer effects in firms' decisions to adopt various governance provisions. We find that a firm's propensity to adopt these provisions increases after other firms in the same board interlock network choose to adopt similar policies. The impact of universal demand laws on the incentives faced by directors as they seek to maximize their career outcomes is a likely mechanism explaining these effects.