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 data set 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. In in-sample tests, language commonality between analysts and CEOs increases the return of trading on analysts’ recommendations by 5.5%. The results mainly stem from less intelligible dialects. Broadly speaking, language commonality can alleviate communication frictions when nonnative languages are used in professional settings.