Isomorphic Pressures in Short-term Managerial Decisions: Evidence from Working Capital Management

Abstract

We investigate whether isomorphic pressures play a role in determining a firm’s working capital policy. Using instrumental variable estimation and excess-variance tests to overcome reflection problem in identifying isomorphic pressures due to peer interactions, we find that average change in working capital of peers positively impacts a firm’s working capital policy choice. Further, we hypothesize and find that the impact of peers’ working capital decisions on a firm is moderated by industry competitiveness. We also find that firms do not follow their peers if they are cash constrained i.e. they cannot afford to follow. In addition, we document that a firm’s long term investment strategy is negatively related to a firm’s propensity to follow peers in deciding its working capital policy.