Posted in: Sustainable Banking

Equator Principles Adoption Peer Pressure or Piggybacking?

Working paper

16-04-14 |
Why do firms adopt voluntary guidelines? In this paper, we answer this question in a market where firms cooperate: the worldwide syndicated loan market where banks can voluntarily adopt the Equator Principles (EP). This setting allows us to study the effects of peer pressure and piggybacking. As banks fear to be excluded from future and profitable deals they may succumb to peer pressure effects. On the other hand, through piggybacking banks free ride on EP adopting banks to benefit from reputational gains. We account for social pressure, as banks are judged by the market for their actions and can potentially suffer reputational damage. We find that piggybacking dominates and leads to a reduced adoption rate of the EP. However, within a network that is highly interconnected, repeated interactions moderate piggybacking and ultimately increase adoption rates.

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