Forward‐Looking Statements and Investor Trading

We conduct textual analysis on 10‐K and 10‐Q filings and find that forward‐looking statements (FLS) associate with reductions in investor trading costs, driven largely by reductions in market‐maker inventory costs. FLS also associate with increases in market depth on both sides of the bid–ask spread and increases in both retail and institutional investor trading activity. Importantly, retail investors are more responsive to FLS than institutional investors. Cross‐sectional tests provide additional evidence with the associations being more pronounced during market downturns and in the absence of earnings guidance. The results are robust to instrumental variable regressions using managerial ability as an instrument. Overall, our results suggest that FLS reduce trading frictions mainly by reducing market‐maker inventory costs, increasing market‐maker competition via increased market depth and increasing investor trading activity, particularly from retail investors. Our results thus highlight the important role FLS play in trading activity, especially for retail investors.