Evidence on the Impact of Adopting English as an External Reporting Language on Foreign Investment, Analyst Following, and Liquidity

• In Event: Concurrent Session 2.4: International Financial Reporting

Abstract

This study investigates whether adopting English as an external reporting language is associated with increased foreign investment, analyst following, and/or liquidity in non-English speaking company’s stock. Specifically, we examine a sample of companies that initiate the issuance of an annual report in English in addition to the local language annual report. Using a difference-in-difference design with a propensity score matched control sample, we find that foreign ownership, analyst following, and liquidity increase significantly around the adoption of English as an external reporting language. We also find that the benefits in terms of increased foreign ownership, decreased zero return days, and increased analyst following are more pronounced for companies incorporated in countries whose language is more pervasive and that the benefit in terms of decreased bid-ask spreads is more pronounced for companies in countries whose local language has more limited use. Finally, we perform a time-series analysis and find that adopting English as a reporting language is associated with decreases in information asymmetry (bid-ask spreads and zero return days) in the year of adoption, increases in analyst following in the year after adoption, and increases in foreign ownership two years after adoption. These results suggest that the economic benefits of adopting English as an external reporting language first become evident through decreased information asymmetry. These results are consistent with the notion that the language used in the annual report can act as a barrier to investment for some investors and that issuing an annual report in English reduces investors’ information processing costs.

Authors

• Michael Erkens, HEC Paris

• Thomas Jeanjean, ESSEC Paris

• Herve Stolowy, HEC Paris

• Teri Lombardi Yohn, Indiana University Bloomington