The use of optimistic tone by narcissistic CEOs

The use of optimistic tone by narcissistic CEOs PurposeThe purpose of this paper is to examine how CEO narcissism can be related to the usage of an abnormal optimistic tone in financial disclosures. Drawing on upper echelons theory, this paper suggests a link between CEO characteristics, such as narcissism, and accounting choices, such as optimistic financial reporting language.Design/methodology/approachTo measure the narcissistic trait of a CEO, the study builds on a model using a set of 15 archival indicators. The usage of an abnormal optimistic tone is assessed quantitatively when looking at firms’ 10-K filings, where “abnormal” refers to tone that is unrelated to a firm’s performance, risk, and complexity. This approach allows for the use of firm-fixed effects for a sample of US listed firms over the period 1992-2012.FindingsThe results show that CEO narcissism is significantly positively related to abnormal optimistic tone in 10-K filings. If a highly abnormal optimistic tone is present, the level of CEO narcissism is positively related to the likelihood of future seasoned equity offerings and larger future investments in research and development.Research limitations/implicationsThe findings are relevant for shareholders and stakeholders as well as auditors and legislators. All stakeholders should be aware of the overly optimistic reporting language resulting from CEO narcissism and need to make allowances for it when assessing firm performance based on financial disclosures.Originality/valueThis study is the first to show in a large-scale sample how CEO narcissism can be related to a firm’s use of optimistic language, and thus contributes to the question of how personality traits affect an organization’s financial reporting strategy. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting, Auditing & Accountability Journal Emerald Publishing

The use of optimistic tone by narcissistic CEOs

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Publisher
Emerald Group Publishing Limited
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0951-3574
D.O.I.
10.1108/AAAJ-11-2015-2292
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to examine how CEO narcissism can be related to the usage of an abnormal optimistic tone in financial disclosures. Drawing on upper echelons theory, this paper suggests a link between CEO characteristics, such as narcissism, and accounting choices, such as optimistic financial reporting language.Design/methodology/approachTo measure the narcissistic trait of a CEO, the study builds on a model using a set of 15 archival indicators. The usage of an abnormal optimistic tone is assessed quantitatively when looking at firms’ 10-K filings, where “abnormal” refers to tone that is unrelated to a firm’s performance, risk, and complexity. This approach allows for the use of firm-fixed effects for a sample of US listed firms over the period 1992-2012.FindingsThe results show that CEO narcissism is significantly positively related to abnormal optimistic tone in 10-K filings. If a highly abnormal optimistic tone is present, the level of CEO narcissism is positively related to the likelihood of future seasoned equity offerings and larger future investments in research and development.Research limitations/implicationsThe findings are relevant for shareholders and stakeholders as well as auditors and legislators. All stakeholders should be aware of the overly optimistic reporting language resulting from CEO narcissism and need to make allowances for it when assessing firm performance based on financial disclosures.Originality/valueThis study is the first to show in a large-scale sample how CEO narcissism can be related to a firm’s use of optimistic language, and thus contributes to the question of how personality traits affect an organization’s financial reporting strategy.

Journal

Accounting, Auditing & Accountability JournalEmerald Publishing

Published: Feb 19, 2018

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