Risk Factor Disclosures and CEO Overconfidence

Abstract

This paper examines whether CEO overconfidence influences the information contents of the Risk Factors section in 10-K report. We find that overconfident CEOs are less likely to use risk-associated words in the Risk Factors section. This is because overconfident CEOs perceive less risk or they have the illusion that they can effectively control the risk faced by the firms. This paper also finds that risk factor disclosures significantly increase during the 2008 global financial crisis. Overconfident CEOs, however, do not change their behavior even under the crisis maintaining their illusion. These findings suggest that managers overconfidence bias may cause a deviation from the optimal level of risk factor disclosures.