Are Foreign Firms Less Fluent? Causes and Consequences of Linguistic Complexity in Foreign Firm Conference Calls

• In Event: Determinants and Consequences of Management Communication

Abstract

We examine the determinants and the capital market consequences of linguistic complexity in conference calls held in English by foreign firms. We find that linguistic complexity is positively associated with the language barriers in the firms’ home country. Also, linguistic complexity in foreign firms’ conference calls affects the extent to which the capital market reacts to the information releases. Firms with more linguistic complexity in their conference calls show less trading volume and price movement following the information releases, after controlling for the actual earnings news. Further, the capital market’s response to linguistic complexity is more pronounced when there is greater implicit (as captured by the presence of foreign investors) or explicit (as captured by how active analysts are in asking questions) demand for the English conference calls. This suggests that the form under which financial information is presented can impose additional processing costs by limiting the investors’ ability to interpret the reported financials.

Authors

• Francois Brochet, Harvard University

• Patricia Lucia Naranjo, massachusetts institute of technology

• Gwen Yu, Harvard University