Language Commonality and Sell-Side Information Production

• In Event: Culture and Institutional Influences

Abstract

I study the effects of sharing common languages (i.e. language commonality) on the information flow between economic agents and on information production in the financial market. I manually construct a novel dataset on prevalent dialects for 2,091 cities and counties in China. I find that language commonality between analysts and CEOs facilitates analysts’ coverage decisions and improves sell-side information production. Trading on recommendations from analysts who share common dialects with CEOs of the firms they follow generates return premiums of about 10 to 13 percent with average holding periods of one year. The effects of language commonality mainly originate from less intelligible, more exclusive dialects. Overall, my findings suggest that language commonality reduces information asymmetry in the capital market.

Author

• Ruishen Zhang, Frankfurt School of Finance and Management