Although adolescents who overestimate peer smoking prevalence are more likely to smoke, little research has focused on the factors associated with why the majority of adolescents overestimate peer smoking rate. The purpose of this study was to examine demographic, social, environmental and behavioural characteristics related to overestimation of peer smoking prevalence among secondary school students. The current study analysed data collected in two Canadian studies that used the Tobacco Module of the School Health Action, Planning and Evaluation System, a school-based questionnaire. One study surveyed 23 458 students (Grades 9-13) in 29 schools during 2001-02, and the other surveyed 25 452 students in 39 schools in 2003. Results of multiple logistic regression indicate that grade, gender, close friends' smoking, seeing smoking at school, family members' smoking, smoking in the home and smoking status have a clear association with overestimation; school smoking rate and susceptibility to smoking show a tentative relationship and warrant further study. Other factors may also be important for prevalence estimation, and further research is needed to identify these factors. Since adolescents tend to overestimate peer smoking prevalence and perceived prevalence is in turn linked to smoking behaviour, interventions should focus on creating realistic perceptions of smoking prevalence.