Abstract

Linguistic features of a firm’s regulatory filings, taken at face value, convey valuable information about the firm. In this paper, we examine whether a manager-specific, non-economic component also exists within these filings and whether investors consider this component when assessing firm value. To do so, we build on prior research that shows founders have unique personality attributes, including excessive optimism. Consistent with a manager-specific component, our results indicate 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 reduced for firms with large auditors, greater ex ante litigation risk and those with high analyst coverage, suggesting that more intense oversight mitigates the effect of founder optimism. Based on stock price at the 10-K release, it does not appear that investors appropmanariately discount the tone disclosed by founder-led firms. Consistent with investor mispricing, we then show that tone for founder-led firms is associated with negative returns during the year subsequent to the 10-K release and is not predictive of future valuation. Finally, to bolster the conclusion that CEOs do, in fact, influence text, we provide broad sample evidence that CEO fixed effects are significantly related to several textual attributes, including disclosure tone.

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• Keyword(s):
• accounting 109
• management 80