Language Commonality and Sell-Side Information Production

Abstract

I study the effects of language commonality (i.e., sharing a native language) on information production in financial markets. Using a hand-collected dataset on the prevalent dialects for 2,091 cities (counties) in China, I identify the effects of language commonality separately from those of shared hometown and geographic proximity. I find that language commonality between analysts and CEOs increases the return of trading on analysts' recommendations by 5.6 percent with a roughly one-year average holding period. The results mainly stem from less intelligible dialects. Broadly speaking, language commonality can alleviate the communication frictions when non-native languages are used in professional settings.

Keywords: language commonality, dialect, analysts, information production

JEL Classification: D82, D83, G24, Z13