Regulation through social norms
Abstract
Social norms can have a powerful influence on behavior. We posit that peer pressure may lead companies to behave in ways that are not dictated by direct economic incentives. Extending prior research findings that the introduction of state-level anti-takeover laws affected transparency levels among firms incorporated in those states, we analyze the behavior of peer firms that were not covered by the new laws, and thus had no direct incentives to change their behavior. We find that changes in practice among the largest firms alter the practices of firms in the same industry that are not subject to the change in legal regime. Comparative statics indicate that the effect is stronger when signals sent by the ‘trendsetters’ are more salient, but is not affected by the economic or legal situation of the “followers”. Firms mimicking the trendsetters experienced a decline in stock price.