Joshua Provost
Veteran
There is no way this is true at all. The camera doesn't do any "bit shifting" to give you a better picture when shooting letterbox.
The "camera" may not, but the DV codec absolutely does. The image is divided into macroblocks, with macroblocks from various areas of the image are combined and compressed into a fixed amount of data. The blocks with all black compress extremely well, nearly as though they weren't there at all, so the other blocks do not require as much compression.
I believe it has been noted on many occassions that the difference in image quality between LETTERBOX and NORMAL is about 5-10% improvement. The disadvantage is no flexibility to reframe in post. So, pick your poison, but it does make a difference.