Do letters to shareholders inform or mislead? Insights from insider trading

qualitative\r\ndisclosures as useful because they have significant effects on analysts’ forecast\r\nrevisions and a firm’s share price. But these results leave unanswered the question\r\nof whether managers write qualitative disclosures to inform or mislead investors.\r\nBased on the signaling theory, we consider two actions by the same manager: one\r\n(insider trading) is a costly signal whilst the other (qualitative disclosure) is the cheap\r\nsignal. We then verify whether they are coherent. We investigate the content and the\r\nverbal tone of the Letter of Shareholders and the insider trading from its author before\r\nand after the letter’s date of release and find that the costly signal (the insider\r\ntrading) is not coherent with the cheap signal (the disclosure). This finding indicates\r\nthat managers do not use qualitative disclosures to offer incremental information but\r\nthat they might use them to mislead investors