As firms use advertising to gain product market advantages and increase their valuation in financial markets, disclosures of their advertising spending are influential — whether they erode organizational competitive advantages in product markets or signal quality in financial markets. These consequences also depend on the disclosure decisions of competing firms, so this study examines the causal effect of organizational herding behavior (manifested in information and financial externalities) that surrounds advertising spending disclosures. Observational learning results in information externality–based herding, as firms learn from peers’ past disclosure choices. Financial externality–based herding arises due to pressures to disclose when investors penalize non-disclosing firms because their peer firms disclose. A 1994 reporting rule made advertising spending disclosures voluntary in the United States, so this study uses that moment to distinguish causal peer influences from correlated behaviors, correcting for the endogeneity of simultaneity and correlated unobservable variables. Robust evidence reveals herding effects among peer firms in the same industry, driven mainly by financial externality mechanisms, such that similar-sized firms seem to drive the behaviors of their peers.
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