Does political risk disclosure signal CEO overconfidence, cost structure choice and firm performance?

Purpose This study aims to examine the relationship between managers’ political risk disclosure and their cost structure choice, measured with the level of cost rigidity and the impact of CEO overconfidence. Design/methodology/approach Using a sample of 1,626 US firms during 2003–2019, this study uses a multivariate regression analysis and a log-linear cost structure model based on prior studies (e.g. Anderson et al., 2003; Banker et al., 2014; Kallapur and Eldenburg, 2005; Noreen and Soderstrom, 1994, 1997). Findings This study finds a positive association between firm-level political disclosure and cost rigidity, suggesting that disclosure provides a signal for managers’ risk awareness and optimistic outlook about future sales. It also finds overconfident CEOs are more likely to choose a more rigid cost structure than nonoverconfident CEOs. However, it finds that firms with overconfident CEOs who provide more political risk disclosure and choose a more rigid cost structure are associated with lower performance, suggesting that overconfidence is associated with suboptimal decisions. Research limitations/implications This study suggests that political risk disclosure signals information about managers’ risk awareness and optimism about future demands. It has an important implication for investors’ decision-making and business valuation as managers’ political risk disclosure signals their ex ante choices of firms’ cost structure. Using a new research setting (i.e. political risk disclosure and cost rigidity), this study shows that CEO overconfidence leads to suboptimal investment decisions, contributing to the stream of research examining the impact of CEO overconfidence on management decision-making and firm performance. Originality/value This study extends the literature on voluntary risk-related disclosure by showing the association between political risk disclosure and cost structure decisions. It contributes to the literature by providing evidence that CEO overconfidence plays an important role in the cost structure decisions, resulting in a suboptimal firm performance.