Shue (2011)
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Author's Hypothesis
Executive social interactions are important determinants of managerial decision making and firm policies. The author tests to see if executive and firm outcomes are more similar among section peers than among class peers using data from HBS MBA students.
How the Author Tested Hypothesis
1.)The author adds additional structure of a linear in means model. The model is specified as:
- [math]Y_{isc}=\theta\bar Y_{sc} + \phi\bar v_{sc} + \alpha_{sc} + \rho_{isc}[/math]
The individual outcomes [math]Y_{isc}[/math] either compensation or acquisitions are effected by both mean group outcomes [math]\bar Y_{sc}[/math] and mean group fundamentals [math]\bar v_{sc}[/math]
In the baseline model, he does not differentiate between the two types of peer effects in calculating the peer elasticity.
2.)The author creates a pairs distance metric. Hypothesis is that the mean absolute distance in outcomes between section peers should be less than the distance in outcomes between class peers. This is estimated using a 2 stage procedure as described on page 17
3.)The author also creates an excess variance metric
What Tests Achieved
He finds strong evidence of peer effects in executive compensation and acquisitions. Under the linear in means model he estimates a lower bound of elasticity of individual outcomes of 10%-20%.
