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Do overconfident CEOs add to corporate stock returns through their risk reporting practice?

Ahmed Hassanein (Department of Accounting and MIS, Gulf University for Science and Technology, West Mishref, Kuwait and Department of Accounting, Faculty of Commerce, Mansoura University, Mansoura, Egypt)
Hosam Abdelrasheed (Faculty of Business Studies, Arab Open University, Al-Ardia, Kuwait and Faculty of Business, Ain Shams University, Cairo, Egypt)
Hany Elzahar (Faculty of Business Studies, Arab Open University, Al-Ardia, Kuwait and Department of Accounting, Faculty of Commerce, Damietta University, New Damietta, Egypt)

Journal of Financial Reporting and Accounting

ISSN: 1985-2517

Article publication date: 1 October 2024

131

Abstract

Purpose

This study aims to explore how the degree of chief executive officer (CEO) overconfidence influences the reporting of risk information. Likewise, it delves into how overconfident CEOs shape the usefulness of such risk disclosures, specifically in terms of their relationship with abnormal corporate stock returns.

Design/methodology/approach

It examined FTSE350 shares-firms from 2010 to 2018. The textual analysis using a bag-of-words approach with the Nudist 6 QSR software package codes the quantity and tone of risk reporting in the UK firms. The study used a metric based on the firm's capital expenditure rate relative to its industry median in the same year to assess the degree of firm’s CEO overconfidence. The abnormal return of stock reflects the investors' reaction to the quantity and tone of risk disclosure.

Findings

UK firms differ considerably in their willingness to share risk information with investors, with a slight tendency toward pessimism in risk reporting. Likewise, firms with high (low) overconfident CEOs disseminate higher (lower) levels of risk reporting. Also, overconfident CEOs provide more positive than negative risk news. Besides, the quantity risk reporting does not impact the abnormal stock return of the corporation. However, the positive risk news has a higher (lower) impact on enhancing the stock return in firms with low (high) overconfident CEOs. Finally, negative risk news tends to have an inverse consequence on the company's stock returns. However, this effect is more pronounced for companies led by highly overconfident CEOs compared to those with less overconfident CEOs.

Practical implications

Stakeholders should be aware that risk reports of firms with overconfident CEOs may exhibit a potential bias toward positive news. Likewise, boards of directors and governance mechanisms should be mindful of the consequences of CEO overconfidence in risk reporting and ensure that risk disclosures accurately reflect the true risk profile of the company.

Originality/value

To the best of the authors’ knowledge, this is the first study to delve into the consequences of CEOs' overconfidence in terms of risk disclosure in the UK. It goes beyond investigating the level or quantity of risk disclosure and also considers the tone of risk reporting, i.e. the messages communicated through the reporting. Likewise, it explores how CEO overconfidence can affect the value-relevance of risk disclosure, shedding light on the role of CEO characteristics in shaping investor perceptions and decision-making.

Keywords

Acknowledgements

The authors would like to extend their sincere gratitude to the Editor of JFRA and the anonymous referees for their constructive suggestions. Likewise, the authors gratefully acknowledge the financial support received from the research sector, Arab Open University, Kuwait Branch under decision number 24113.

Citation

Hassanein, A., Abdelrasheed, H. and Elzahar, H. (2024), "Do overconfident CEOs add to corporate stock returns through their risk reporting practice?", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-03-2024-0146

Publisher

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Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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