The Effect of Language on Investing: Evidence from Searches in Chinese Versus English

Abstract

This study examines the language effect on investing using the Google search records of Chinese- versus English-speaking searchers. First, we find that the attention of Chinese speakers induces that of English speakers, increases abnormal news coverage, and has better predictability on stock returns. Second, Chinese searchers react faster to the shock of news events than those who search in English possibly because of a time lag for translation. Third, Chinese attention can reduce the price drift of earning surprises, whereas English attention cannot do so. Last, evidence shows that the firm-level information asymmetry is the channel of the local advantage. Therefore, our results suggest that investors using their local official language have a home advantage to find more profitable investment opportunities.

Keywords: investor attention, local advantage, return prediction, earning surprise, information asymmetry

JEL Classification: G11, G12, G14, G17