Do letters to shareholders have information content?

Purpose - The purpose of this paper is to investigate the information content in letters to shareholders in terms of business content, tone and types of business vocabulary. Design/methodology/approach - The study uses multiple regression models to test the information content concerning business content, tone, and types of business vocabulary in letters to shareholders. Two textual analyses in accounting research dictionaries are used. Loughran and McDonald’s (2011) dictionary is used as a scheme to identify the positive and negative words, and Kothariet al.’s (2009) dictionary is used to identify the business vocabulary. Findings - Letters to shareholders contain incremental information for investors. First, the results show that the market reacts negatively to the content of these letters. The more that business content is disclosed, the lower the abnormal returns. It can be seen that investors catch additional information from letters to shareholders. Second, investors in negative unexpected earnings firms tend to not trust the concentration of positive tone in the letters. Third, some types of business vocabulary in the letters have an influence on investors’ decisions. In addition, larger amounts of business content are seen to be negatively related to firms’ future performance. Practical implications - Due to the effect of the content of letters to shareholders, the Securities Exchange Commission may wish to consider the results of this study before setting new disclosure regulations. Specifically, some inside information might have a negative effect on market returns. Originality/value - The study indicates that letters to shareholders are a disclosure venue between companies and investors, where investors react to certain business vocabulary. Some business words are associated with lower future performance. Therefore, the market reacts negatively when these words are reported in the letters.