Gaining insights into imitative behaviour

By Alistair Jones

SMU Office of Research & Tech Transfer – Among institutional investors, the practice of investing in companies or funds that aim to achieve market-rate financial returns, while also considering positive social or environmental impacts, is gaining more popularity than ever, according to a 2020 report from financial giant Morgan Stanley.

Whether it is driven by an awareness of climate change, public dissatisfaction with traditional economic models that foster inequality, or the more recent devastation of COVID-19, it is increasingly expected that asset managers will invest responsibly.

A recent industry report from Barron's magazine claims the size of the impact investing market grew by “an astonishing” 42.4 percent in the past year – from $502 billion to $715 billion (US dollars) in assets under management. People are more active in allocating their wealth towards the possibility of a better future.

In further good news for proponents of ethical, impact and sustainable investing, new research in progress, co-authored by Xueying Bian, a PhD in Economics candidate at Singapore Management University (SMU), reveals a novel effect that can encourage businesses to adopt a more socially responsible approach.

It hinges on the propensity of peer businesses to imitate each other to maintain parity. As the researchers note, firms obtain cues from institutional or competitive fields for appropriate behaviours. Members from the same institutional field, such as an industry or a community, are regarded as peers, who are particularly instrumental in influencing firms’ strategic decisions.

Fear of losing investment

“Peer effects between firms is a topic I'm very interested in,” says Bian. “And I have several papers exploring unknown peer links.”

For example, she and her colleagues have identified a previously unconsidered field of imitative influence: peer investees. It describes firms that seek, or have gained, capital from a common institutional investment fund.

The researchers propose that as investee peers compete for financial capital, they are motivated to pay attention to, and imitate, each other’s behaviours to avoid being deemed unfavourable by the common institutional investor and losing its investment.

To verify this, they focus on levels of corporate social responsibility (CSR), a common form of company self-regulation that aims to align social and environmental activities with business purpose and values.

The researchers see it as an area where investee peers – which can belong to different industries or geographic communities – are likely to imitate each other, and they propose that when other investee peers improve their CSR performance, the focal firm will follow suit.

“By analysing a sample of 1613 US-listed firms from 2002 to 2017, we find that investee peers with a high level of CSR will lead the focal firm to better its own CSR performance,” Bian says.

“The investee peer effects are robust under different definitions of large institutional investors and after ruling out confounding factors. Now, we are trying to use additional empirical analysis to show more direct evidence.”

Issuing CSR reports is typically considered voluntary – such in the US – but the practice is widespread globally because it contributes positively to a brand's reputation, as the research of Bian and her colleagues highlights.

In Singapore, all SGX-listed companies are required to produce an annual sustainability report.

Trading strategy

In a different paper, Bian and co-researchers identify another unconventional peer effect among companies with similar levels of employment satisfaction.  

Employee welfare policies have a proven financial impact as job satisfaction translates into tangible effects, such as productivity gains, that lead to a company's increased profitability and success. Also, employee turnover is significantly lower and with it the costs.

The researchers note that people like to chat with one another and that comparing their respective work benefits is a popular topic. Social media is also a channel for this information exchange.

The researchers posit that social transmission activities can drive a knowledge spillover of employee welfare policies across firms and that this can lead to imitative behaviour which, again, transcends industry boundaries. They explore the implications of this on firm stock performance.

For data, they turn to Glassdoor – the largest career website, which publishes company reviews written by former and current employees.

Based on each firm’s ratings on Glassdoor in June of the previous year, the researchers obtain and rank the top-1000, US-listed firms (excluding financial firms) and test them for return predictability in the current year.

They find that the annual change in the employee satisfaction of the focal firm can be predicted by the annual change in the employee satisfaction of its peer firms, with similar employee satisfaction levels, in the previous year.

They also find that the growth in employment, revenues and profitability of these peer firms predicts the focal firm’s growth in each of these three characteristics.

The return predictability pattern among firms with similar employee satisfaction levels cannot be explained by risk but is consistent with a gradual information diffusion of cash flows.

“[Return predictability] is an important field in asset pricing research,” says Bian. “Certain information helps predict firm stock price and the trading strategy based on this information could yield abnormal stock returns.”

Interestingly, the researchers find the return predictability associated with similar employee satisfaction levels is present in flexible labour markets, such as the US, Canada and the UK, but not observed in the more rigid labour markets of France and Germany.

Understanding the world

Bian was one of just four students to be awarded a 2020 SMU Multidisciplinary Doctoral Fellowship, granted to existing PhD students whose research output shows the use of techniques from two or more fields of research.

“I think multidisciplinary research is increasingly important in economic research,” Bian says. “Combining the findings and methodology in different fields will definitely help economists better understand the world.”

Her research indicates a particular interest in behavioural economics.

“In economic research, agents (such as consumers and suppliers) are commonly assumed to be rational. However, individuals are irrational in reality. For example, the risk attitudes could result in behavioural bias in the market.

“However, due to the complexity and heterogeneity of psychological activities, this field is still under-explored. This field is both interesting and challenging. Thus, I would like to dig more deeply in this field,” Bian says.

Back to Research@SMU May 2021 Issue