The Predictive Value of Optimism in Letters to Shareholders

Abstract

In this study, we investigate the predictive value of optimism expressed in letters to shareholders. We explore if optimism in these letters can be used to predict the future performance of 457 firms traded on the NYSE. To measure future performance, we use six different performance measures. Patelli and Pedrini (2014) found that optimistic tone in letters to shareholders is congru-ent with both past and future performance, thus arguing that it is sincere. Our study expands their research by examining if optimistic tone can predict performance up to five years after the publication of the letter to sharehold-ers. Using univariate analysis, we find that the most optimistic firms tend to perform better than the least optimistic firms. However, through regres-sion analysis, we are unable to find that optimism is a significant predictor for future firm performance. Based on our univariate analysis, we conclude that the most optimistic firms perform better than the least optimistic firms. However, we cannot conclude that optimism expressed in the letter success-fully can predict future firm performance. Prior research has found that impression management commonly takes place in annual reports (Clatworthy and Jones, 2006). Because of this, we argue that impression management could be used as an explanation for the lack of significant results, since the existence of impression management in annual reports would separate optimism from firm fundamentals, disabling optimism from being able to predict future performance.