Language and Risk in Financial Markets
9 Pages Posted: 26 Jul 2022
Date Written: July 6, 2022
Abstract
We take inspiration from the linguistic relativity hypothesis and investigate language as a driver of risk in financial markets. Specifically, we explore whether the strength of future-time reference (FTR) in a language affects the risk of investing in stocks in companies doing business in the language. We exploit the multilingualism in Belgium to provide important evidence: While all public firms are subject to the same country-level capital market laws, only a fraction are located in a region where a strong-FTR language is used. Using regression analysis to compare the risk of stocks in firms headquartered in strong- versus weak-FTR language regions, we find that FTR has a negative effect on stock risk, providing empirical support for linguistic relativity in naturally occurring behaviors.
Keywords: Linguistic relativity hypothesis; future-time reference; financial risk
JEL Classification: G12
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