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

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.