Research

Overconfident CEOs overestimate their ability to generate value. We investigate how this affects divestiture activity and whether it moderates a CEO's investment lifecycle. We hypothesize and find that overconfident CEOs are less likely to divest units and their divestment decisions are less sensitive to career lifecycle concerns. In addition, after a divestiture overconfident CEOs spend more on capital expenditures (Capex) and acquisitions than other CEOs. Overall, our results suggest that overconfident CEOs prefer to retain units and divest largely to maintain an investment trajectory. Our results further highlight the important role behavioral traits such as overconfidence play in corporate decision-making.

It is often argued that “misinformation” and “disinformation” should be suppressed as they perpetuate false or misleading narratives, and can contribute to, or cause, significant harm. However, such anti-misinformation rules face significant challenges and can undermine free speech. Australia’s foray into anti-misinformation rules provides a cautionary example. The problems start with broad and uncertain definitions of “misinformation”. Further, due to self-interest, lobbying, or misplaced assumptions of accuracy, powerful interests are often exempted from anti-misinformation rules. Enforcement mechanisms also risk suppressing innocuous content in service of reducing the chance of “misinformation” falling through the cracks. Anti-misinformation rules thus face significant problems that must be solved if they are to be implemented.

Regulators seek to balance investor protection with the costs of that protection. This often leads to a distinction between “accredited” and “retail” investors. Only “accredited” investors can invest in certain “risky” or “illiquid” assets, including start-ups and wholesale funds. But what should be the “bar” to be classified as “accredited”? Should people be able to qualify via income, wealth, or education? Should they be able to self-certify? Thus, this article considers the situation in the US, UK, and Australia and argues in favour of letting people qualify via wealth, income, and education and being able to self-certify.

* Financial reports have become more complex and less readable over time * Worsening financial report readability can have negative consequences, including in relation to financial analysts, investors, and lenders * Regulation has had a mixed impact on readability, sometimes increasing disclosure volume and complexity despite attempts to simplify language * Future regulation can look towards drafting practices and properly calibrated standardization

We hypothesize and show that the impact of a regulatory shock depends both on the shock itself and on how firms respond, which can itself depend on the firm's governance attributes. To explore this, we use the staggered passage of Universal Demand (UD) laws, which insulate managers from derivative lawsuits. We find that, on average, firms respond to UD laws by increasing risk-taking incentives (vega), thereby compensating for weaker external discipline, and incentivizing valuable risky investments. Corporate governance, institutional ownership, and CEO power influences the likelihood of adjusting compensation. The firms that do boost vega subsequently experience greater innovation, and a stronger market response to new product announcements. Our results help to reconcile extant findings on the effects of UD laws by showing that the beneficial impact of the laws is conditional on firms’ strengthening their CEOs’ risk-taking incentives, a choice affected by their latent governance arrangements.

We predict that firms’ attempts to reduce litigation risk can inadvertently worsen financial report readability by increasing reports’ size, complexity, and altering their linguistic characteristics. We find that litigation risk reduces report readability. Readability worsens after firms experience a securities class action. This persists for several years after lawsuit resolution. To alleviate endogeneity concerns, we show that the litigation experience of a firm's managers and directors at other firms impacts readability. We also find that firms adjust readability around litigation flashpoints. Using an SEC rule change as an exogenous shock, we show that adjustments to readability can moderate firm litigation risk.