How do overconfident CEOs respond to regulation fair disclosure? Evidence from financial report readability

Abstract

This paper examines how overconfident CEOs adjust financial report readability (FRR) in response to Regulation Fair Disclosure (RegFD). Our difference-in-differences analysis shows that while being associated with lower readability ex ante, overconfident CEOs increase their firms' FRR relatively to non-overconfident peers after the importance of public disclosure grows due to RegFD adoption. We also find that the relative increase in readability is dependent on the extent of firms' financial constraints and financing through the equity market. Overall, our results suggest that overconfident CEOs fine-tune FRR to reduce the external equity financing cost, especially when selective disclosure and communication are restricted.