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Fund companies regularly send shareholder letters to their investors. We use textual analysis to investigate whether these letters’ writing style influences fund flows and whether it predicts performance and investment styles. Fund investors react to the tone and content of shareholder letters: A less negative tone leads to higher net flows. Thus, fund companies can use shareholder letters as a tactical instrument to influence flows. However, at the same time, a dishonest communication that is not consistent with the fund’s actual performance decreases flows. A positive writing style predicts higher idiosyncratic risk as well as more style bets, while there is no consistent predictive power for future performance.
TO MAKE PROFITABLE INVESTMENT DECISIONS, INVESTORS NEED TO ASSESS THE FINANCIAL FUTURE OF FIRMS. DUE TO INVESTORS’ LACK OF INTERNAL INFORMATION ABOUT THE FIRMS’ FUTURE PROSPECTS, THEY OFTEN HAVE TO RELY ON MANAGERS’ VERBAL STATEMENTS FOR THIS TASK. HOWEVER, AS MANAGERS MIGHT HAVE AN INCENTIVE TO PRESENT POSITIVELY BIASED INFORMATION, THE VALUE OF THEIR STATEMENTS FOR INVESTORS IS NOT CLEAR.
IN THIS REPORT, WE SHOW HOW TEXTUAL ANALYSIS TOOLS CAN BE USED TO ASSESS THE VALUE OF MANAGERS’ VERBAL STATEMENTS DURING EARNINGS CONFERENCE CALLS FOR INVESTORS. WE FIND THAT IN PARTICULAR MANAGERS’ NEGATIVE STATEMENTS SIGNI FICANTLY PREDICT LOWER FUTURE EARNINGS.
MANY PEOPLE CLAIM THAT FIRMS NEED TO EMBRACE DIGITAL TECHNOLOGIES. YET, WE KNOW LITTLE ABOUT DIGITAL EMBRACEMENT, ITS ANTECEDENTS, AND ECONOMIC CONSEQUENCES. THIS ARTICLE PROPOSES A TEXTUAL APPROACH TO MEASURE DIGITAL EMBRACEMENT AND APPLIES IT IN AN EMPIRICAL STUDY COVERING 2,278 PUBLICLY LISTED U.S. FIRMS OVER 17 YEARS. THE RESULTS OUTLINE A VAST HETEROGENEITY IN FIRMS’ DIGITAL EMBRACEMENT IN AND ACROSS INDUSTRIES. REMARKABLY, A HIGHER DIGITAL EMBRACEMENT PREDICTS HIGHER FINANCIAL PERFORMANCE.
