Who Let the Secrets Out? Overconfidence and the Disclosure of Proprietary Information

Abstract

This paper investigates the role of manager perception in proprietary disclosure decisions. I find robust evidence that firms with overconfident CEOs (managers who are more likely to perceive proprietary costs to be lower) provide significantly more narrative R&D disclosures than firms without overconfident CEOs. In cross-sectional analysis, I find that this result is driven by observations where proprietary costs are more significant and salient. Consistent with R&D disclosures being proprietary, I find that the return on R&D is significantly lower when firms have more R&D disclosure and that this relation is not impacted by the presence of an overconfident CEO except through higher R&D disclosure. Finally, I find no association between having an overconfident CEO and nonproprietary disclosure. Collectively, these results suggest that manager perception of proprietary costs is an important determinant of firms’ voluntary proprietary disclosure.