Through the Eyes of the Founder: CEO Characteristics and Firms' Regulatory Filings

Abstract

We examine whether textual attributes of firms’ regulatory filings reflect CEO characteristics and whether investors consider this relation when assessing firm value. We build on prior research that shows founders have unique personality attributes, particularly overoptimism. We find that 10-K text for founder-led firms is characterized by “excess” optimism relative to current and future realized earnings and relative to non-founder-led firms. The effect is mitigated for firms with large auditors, high litigation risk and high analyst following. Based on stock price at the 10-K release, investors do not appear to appropriately discount the tone, resulting in predictable negative returns during the year subsequent to the 10-K release, particularly for the first two years after firms go public. Collectively, our findings contribute to the existing literature examining the effects of executives on firm disclosure by providing initial evidence about the conditions under which firms’ scripted narrative disclosures reflect CEO characteristics.

Keywords: Regulatory Filings, Mandatory Disclosure, Founder, Managerial Style, CEO

JEL Classification: G14, G18, L26, M41