Optimistic Disclosure Tone and CEO Career Concerns

Abstract

We argue that CEOs use narrative disclosure tone to assuage career concerns. In particular, we predict that more talented CEOs use a more optimistic tone at the beginning of their tenures to build a reputation of strong performance ability. We run our tests on a large sample of US firms’ 10-K disclosures, and show that highly able CEOs use a more optimistic tone early in their careers. Our results are robust to a number of alternative specifications. Overall, our evidence indicates that optimistic tone is used by CEOs to signal their superior performance ability. Firms with more optimistic disclosures present higher value-weighted cumulative abnormal returns around last quarter earnings announcements, and are more likely to access future debt, engage in greater future capital investment and pay more future dividends.