The Impact of Linguistic Distance and Financial Reporting Readability on Foreign Holdings of U.S. Stocks
48 Pages Posted: 16 Oct 2018 Last revised: 7 Apr 2019
Date Written: April 5, 2019
Using a sample of 75 countries, we show that foreigners invest less in U.S. stocks when they are from countries with greater linguistic distances and when U.S. financial reports are more difficult to read. This suggests that linguistic distance and linguistic complexity in financial reports act as frictions for foreign investors, even in the U.S. market where foreign investors should have the greatest ability, resources, and incentives to overcome language translation and readability issues. Additionally, we show that foreigners invest more in U.S. Treasuries and consume more when facing greater linguistic distance and financial reporting readability difficulties. These results are consistent with a “substitution effect” where foreigners who want to hold U.S. stocks but are sufficiently deterred by linguistic distance and readability frictions (1) appear to invest in U.S. Treasuries which are less linguistically complex because they do not have financial statements and/or (2) invest less in U.S. equities and consume more.
Keywords: linguistic distance; financial reporting readability; foreign investors; U.S. stocks; U.S. Treasuries
JEL Classification: M41, F21, G15
Suggested Citation: Suggested Citation