CEO Career Concerns, Optimism and Accuracy in Disclosure Tone

Abstract

We argue that CEOs manage narrative disclosure tone in response to career concerns. Using a large sample of US firms’ 10-K disclosures, we find that managers use less optimistic tone in their early career years. Our evidence also indicates that CEOs appear to use optimistic tone to signal their performance ability. We find that highly able CEOs use a more optimistic tone in their early career years, and that this tone accurately reflects their superior future performance. Career concerns influence tone in settings where boards are independent, the CEO is not the chairman of the board, and managerial compensation packages offer less severance pay. Firms with optimistic disclosures are more likely to access future debt, engage in greater future capital investment, and pay more future dividends. This is particularly true in firms where ex post performance is strong. Our results suggest that disclosure strategies are connected to managerial human capital and to CEO performance assessment concerns.

Keywords: CEO career concerns, CEO ability, Optimistic disclosure tone, CEO assessment, 10-K disclosures, Narrative disclosure, CEO turnover

JEL Classification: M12, M41, M49