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 netflows.
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.