The Effect of CEO Locality on Disclosure Tone: Evidence from US Firms

Recent literature suggests that, compared to non-local CEOs, local CEOs care more about reputation capital and are also less likely to make myopic decisions. Prior studies have also found that the tone of financial disclosures is likely influenced by the characteristics of CEOs (Luo and Zhou 2017), consistent with the principles of the upper echelons theory (Hambrick and Mason 1984). Building on this literature, I try to investigate the effect of CEO locality on disclosure tone. My empirical analyses reveal that firms with local CEOs exhibit a more optimistic and less negative tone compared to firms with non-local CEOs, suggesting an optimistic tone associated with local CEOs. Seeking the underlying reasons, I find that firms with local CEOs demonstrate higher performance than firms with non-local CEOs. In addition, I also find that this association affects annual report readability, which is measured by the FOG index. Additionally, I find that the effect of the CEO’s birthplace is stronger than the effect of the university from which they graduated. My results are robust when using the matched sample, entropy balancing, controlling for potentially correlated variables, and considering other alternative specifications. I contribute to a maturing stream of disclosure literature by highlighting how CEOs’ individual traits affect tone management.