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

See all articles by Kristian D. Allee

Kristian D. Allee

University of Arkansas - Department of Accounting

Lisa S. Anderson

University of Arkansas

Michael J. Crawley

University of Arkansas

Date Written: April 5, 2019

Abstract

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

Allee, Kristian D. and Anderson, Lisa S. and Crawley, Michael Joseph, The Impact of Linguistic Distance and Financial Reporting Readability on Foreign Holdings of U.S. Stocks (April 5, 2019). Available at SSRN: https://ssrn.com/abstract=3254396 or http://dx.doi.org/10.2139/ssrn.3254396

Kristian D. Allee

University of Arkansas - Department of Accounting ( email )

University of Arkansas
Business Building 458
Fayetteville, AR 72701
United States
479-575-5227 (Phone)

Lisa S. Anderson

University of Arkansas ( email )

Fayetteville, AR 72701
United States

Michael Joseph Crawley (Contact Author)

University of Arkansas ( email )

Sam M. Walton College of Business
Room 454
Fayetteville, AR 72701
United States
(479) 575-6132 (Phone)

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