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Individual firms respond to their peers' influence by adopting an imitation or competition policy. Prior research has documented that firms imitate peers' financial decisions, yet empirical evidence on heterogeneous competing behavior is limited. Since corporate dividend smoothing serves as a competitive tool and relates to financial flexibility, we examine whether individual firms' dividend smoothing behavior is affected by peer firms' behavior. Using peers' idiosyncratic equity risk as the instrumental variable in a 2SLS estimation to mitigate the endogeneity, we find robust evidence supporting that firms tend to behave oppositely to their peers, i.e., individual firms choose to smooth dividends more when peers smooth less, and they smooth less when peers smooth more. In addition, the heterogeneous peer effects of dividend smoothing are more pronounced if firms are in industries with more intense product market competition and more serious information asymmetry problems. Our evidence suggests that firms adopt heterogeneous strategies as responses to peer competition, which casts light on firms' dividend smoothing policy in Chinese context.
Chen et al. (Thu,) studied this question.