Regulation through Social Norms

Social norms can act as a powerful way of regulating human behavior. We argue that peer pressure may lead companies to behave in way that is not dictated by direct economic incentives. Prior literature shows that new state-level antitakeover laws led firms incorporated in those states to change their transparency level. We examine the behavior of firms that were not affected by the new laws (and hence should not have changed their behavior) but had peers that were affected. We find that the change in practices among the largest firms of an industry alters practices of firms in the same industry that were not subject to the change in legal regime. Comparative statics indicate that the effect is stronger when the signal sent by the trendsetters is more salient, when the propensity of the followers to be influenced is greater but is not affected by the economic situation of the followers.