Through the eyes of the founder: CEO characteristics and firms’ regulatory filings

Abstract

AbstractWe examine whether textual attributes of founder‐led firms’ regulatory filings reflect founder‐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. Our results suggest 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 the 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 2 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.