We find that a one-standard-deviation increase in peer R&D investment is associated with about 13 percent rise in a firm’s R&D after controlling for known determinants. We use stock liquidity and trade secret legal protection among peers as instrumental variables and find similar results. In addition, the peer effect on R&D spending is more prominent for firms with tighter financial constraints, overconfident or highly incentive CEOs, high growth opportunity, and in more competitive or innovative industries. We also find that firms with more peer R&D spending have higher subsequent innovation output and firm value. However, these benefits come together with higher stock return volatility and stock price crash risk. Overall, our results provide novel evidence on a robust peer effect in R&D investment.