Herd Behavior in Voluntary Disclosure Decisions: An Examination of Capital Expenditure Forecasts*

55 Pages Posted: 17 Jan 2005

See all articles by Nerissa C. Brown

Nerissa C. Brown

University of Illinois at Urbana-Champaign

Lawrence A. Gordon

University of Maryland - Department of Accounting & Information Assurance

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Date Written: March 15, 2006

Abstract

This study documents evidence consistent with herding in voluntary disclosure decisions in the context of capital expenditure forecasts and investigates two possible reasons for this behavior. Theories of rational herds suggest that herding in disclosure decisions may be due to either (1) the influence of information reflected in peer firms' past disclosure decisions (informational herding), and/or (2) managers' concern for their reputations (reputational herding). Using duration analysis for repeated events, we examine the timing of capital expenditure forecasts for a broad sample of disclosing and nondisclosing firms. We predict and find that the propensity to release capital expenditure forecasts is positively associated with the proportion of prior disclosing firms within the same industry, thus, providing evidence of herding. We also find that this positive association is even higher for firms in highly concentrated industries and firms with low barriers to entry. This finding suggests that firms facing relatively high industry competition may have greater incentives to herd. To provide further evidence of the underlying sources of this behavior, we examine whether the tendency to herd varies with the information content and specificity of prior same-industry forecasts, and with the level of managerial reputation. Our findings show that managers are more likely to disclose their expenditure plans when prior peer forecasts signal a decrease in future capital spending and when prior peer forecasts are more precise. Furthermore, we find that less reputable managers exhibit greater tendencies to herd in their disclosure decisions. These findings indicate that informational and reputational factors are both significant sources of herding in voluntary disclosure decisions.

Keywords: herding, disclosure

JEL Classification: D8, M41

Suggested Citation

Brown, Nerissa C. and Gordon, Lawrence A. and Wermers, Russell R., Herd Behavior in Voluntary Disclosure Decisions: An Examination of Capital Expenditure Forecasts* (March 15, 2006). AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=649823 or http://dx.doi.org/10.2139/ssrn.649823

Nerissa C. Brown (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Lawrence A. Gordon

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

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