Peer Sentiment and Firm Production Decisions: Evidence from Homebuilders

This paper examines the effect of peer sentiment on firm production decisions using data from public homebuilders in the US. Peer sentiment is measured by the NAHB/Wells Fargo Housing Market Index, derived from a monthly survey of homebuilders' perceptions about the housing market. A one-standard-deviation increase in the peer sentiment index induces an average builder to increase their land inventory by 6.4% (4,937 lots) and building expenses by 5.9% ($34.5 million). The effect is weaker when firms are highly divided in their opinions. Following peer sentiment does not affect stock price performance, but overbuilding is associated with a lower return-on-asset.