CEO Characteristics and Tone at the Top Inconsistency

Abstract This paper provides evidence that different corporate disclosures have different roles and that Chief Executive Officer’s (CEO) characteristics influence language choices. We document that relative to the Management Discussion and Analysis (MD&A), CEO letters to shareholders have more positive tone when describing the same firm performance. While the MD&A provides incremental information to the numerical data in the financial statements, the language in the CEO letter is largely inconsistent with current firm performance and is influenced predominantly by the level of positive words. This inconsistency is attributed to overconfident CEOs, who tend to have an overly positive view of their ability and firm prospects while underestimating firm risk. Further analysis indicates that CEO gender also affects CEO letter language style, with female CEOs using more neutral tone. Taken together, our evidence suggests that CEO letters are an important source of corporate disclosures, which is shaped by CEO characteristics.