Decomposing Uncertainty and Its Effects on Imitation in Firm Exit Decisions

52 Pages Posted: 19 Jan 2013

See all articles by Vibha Gaba

Vibha Gaba

INSEAD Entrepreneurship and Family Enterprise

Ann Terlaak

Wisconsin School of Business, UW-Madison

Date Written: January 18, 2013


This study examines the effects of different uncertainty types on interorganizational imitation in firm exit decisions. We draw upon herding models to conceptualize exit decisions as being based on a firm’s private information, which the firm updates with information inferred from observing the actions of others. We posit that different types of uncertainty differentially affect this observational learning process; in particular, we propose that certain uncertainty types attenuate (rather than foster) observational learning and subsequent imitation. We test this theory using a 29-year panel data set on the exit of private venture capital firms. Our results indicate that observational learning does influence imitation in firm exit decisions, and they also suggest that a common belief — that uncertainty enhances imitation — does not apply to all types of uncertainty. Specifically, we find that uncertainty fosters imitation only when it is idiosyncratic to the firm; uncertainties that are common to all firms, in contrast, actually reduce reliance on observational learning. By decomposing uncertainty into different types and explicating their effects on imitation, we demonstrate that this relationship is more nuanced than previously assumed and, in addition, highlight the role of deliberate information processing in imitation.

Keywords: Imitation, Uncertainty, Organizational Learning, Herding, Firm Exit

Suggested Citation

Gaba, Vibha and Terlaak, Ann K, Decomposing Uncertainty and Its Effects on Imitation in Firm Exit Decisions (January 18, 2013). INSEAD Working Paper No. 2013/09/EFE, Available at SSRN: or

Vibha Gaba (Contact Author)

INSEAD Entrepreneurship and Family Enterprise ( email )

Finance area, Boulevard de Constance
Fontainebleau 77305

Ann K Terlaak

Wisconsin School of Business, UW-Madison ( email )

4261 Grainger Hall
975 University Avenue
Madison, WI 53706-1481
United States
608-262-5227 (Phone)


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