We examine how firm investment affects peer firms' investment. To uncover the exogenous component of firm investment, we exploit time-variation in the rise of state corporate income taxes in the United States and utilize heterogeneity in firms' exposure to these tax increases to construct an instrumental variable strategy. We identify a strong and positive causal effect of firms' investment decision on neighboring firms. Moreover, we examine physical and intangible investment separately and find that a firm's investment in physical (intangible) capital only responds to peers' investment in physical (intangible) capital. These results indicate the presence of peer effects among firms' investment decisions.
SAFE Working Paper No. 220