The President's Letter to Stockholders: A New Look

Abstract

Clearly, an analyst cannot rely exclusively on the president's letter to forecast a company's stock price performance. However, automatic dismissal of the president's letter may result in the loss of important signals. Presidents of high-performing companies tend to expect gains, and their letters convey those expectations. Presidents of low performers tend to discuss neither gains nor losses. Furthermore, mention of imminent losses is associated with subsequent stock price declines, whereas expressions of confidence tend to be associated with subsequent increases in stock price.

The results are encouraging, but further analysis is needed before generalizations may be made. The sample used in this analysis was intentionally composed of two extremely different groups. If differences had not been found in this sample, it is unlikely that they would be found anywhere. This study thus represents a preliminary analysis. Further analysis is required to determine whether the variables that differentiate groups can be used generally to predict individual company stock performance.

Two other limitations to the present study should also be noted. First, the firms examined were drawn from a cross-section of industries. Confounding variables might be controlled by performing a similar analysis within a single industry or examining individual firms over several consecutive years. Second, firms were selected without regard to past performance. The form and content of the president's letter may be conditioned by operating results in previous years.