Overconfidence and Proprietary Investment Disclosure
51 Pages Posted: 7 Aug 2018 Last revised: 12 Apr 2019
Date Written: April 1, 2019
This paper investigates the role of idiosyncratic CEO traits in proprietary disclosure decisions. I analyze narrative R&D disclosures in the 10-K and find evidence that they have notable proprietary costs associated with their disclosure. Specifically, managers provide fewer R&D disclosures when firms face more significant competition and, consistent with information spillovers, firms’ underlying return on R&D is significantly lower in the presence of high R&D disclosure. Next, I examine CEO overconfidence and find that firms with overconfident CEOs have significantly more narrative R&D disclosures. Using a novel approach examining verb tenses, I identify R&D disclosures that are more likely to contain propriety information (i.e., disclosures about current and future R&D activities) and find that the association between overconfidence and R&D disclosure is stronger for more proprietary disclosures. Further, the association between R&D disclosure and the return on R&D remains consistent after controlling for overconfidence. Finally, I find no evidence that CEO overconfidence is associated with nonproprietary disclosure. These results suggest that CEO overconfidence is associated with lower perceived costs of proprietary disclosure, leading to more voluntary disclosure of proprietary information.
Keywords: Proprietary Information, Voluntary Disclosure, Investments, Overconfidence, R&D, CAPX
JEL Classification: M10, M41, G30
Suggested Citation: Suggested Citation