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

qualitative disclosures as useful because they have significant effects on analysts\u2019 forecast revisions and a firm\u2019s share price. But these results leave unanswered the question of whether managers write qualitative disclosures to inform or mislead investors. Based on the signaling theory, we consider two actions by the same manager: one (insider trading) is a costly signal whilst the other (qualitative disclosure) is the cheap signal. We then verify whether they are coherent. We investigate the content and the verbal tone of the Letter of Shareholders and the insider trading from its author before and after the letter\u2019s date of release and find that the costly signal (the insider trading) is not coherent with the cheap signal (the disclosure). This finding indicates that managers do not use qualitative disclosures to offer incremental information but that they might use them to mislead investor