Organizational Herding in Advertising Spending Disclosures: Evidence and Mechanisms

Abstract

As firms use advertising to gain product market advantages and increase their valuation in financial markets, disclosing their advertising spending is influential—whether it erodes organizational competitive advantages in product markets or signals quality in financial markets. The authors argue that firms lower their own advertising disclosure uncertainty by observing peers’ advertising disclosure, and they empirically investigate information-based organizational herding in the context of advertising spending disclosure, where a 1994 reporting rule made advertising spending disclosures voluntary in the United States. The authors examine whether a firm relies on information from benchmark leaders or similar peers to resolve disclosure uncertainty. A novel identification strategy, which uses partially overlapping strategic groups, to mitigate simultaneity and correlated unobservables, shows robust evidence for herding effects among peer firms in the same strategic group. Moreover, firms are more likely to resolve disclosure uncertainty from similar peers rather than from benchmark leaders. The authors discuss how firms can use knowledge of competitors’ predicted advertising disclosure decisions conditional on their disclosure to their strategic advantage in product and financial markets.

Keywords: advertising spending, financial markets, herding, product markets, voluntary disclosure

JEL Classification: L10, M10