The Effect of Peer Firm Restructuring on Corporate Investment Decisions

This study examines whether companies’ investment decisions are influenced by their industry peers’ restructuring activities. We expect that peer firm restructuring leads to a reduction in a company’s investment levels through two economic channels: (1) signaling deteriorating industry conditions during negative shocks, and (2) signaling efficiency-enhancing restructuring that increases competitive pressure during positive shocks. Consistent with our expectations, we find that same-industry peer firms’ restructuring is negatively associated with a company’s capital expenditures, after controlling for industry sales growth and other industry-level attributes. Our results hold both in industries experiencing negative shocks and in industries experiencing positive shocks. Additional analyses show that in highly competitive, growing industries, the negative effect of peer restructuring on investment is driven by restructuring peers whose efficiency improves post-restructuring. This effect is also stronger in capital-intensive and high-volatility industries, where firms face higher adjustment costs and greater uncertainty. Consistent with our investment findings, stock option-based evidence shows that firms facing high levels of peer restructuring exhibit significantly greater implied volatility skewness, a market-based measure of downside risk. Taken together, our findings highlight the informational value of peer firms’ restructuring activities in corporate investment decisions, offering insights into how firms adapt resource allocation strategies in dynamic economic environments.