Person:

Brochet, Francois

We examine the determinants and capital market consequences of linguistic complexity in conference calls held in English by non-U.S. firms. We find that linguistic complexity is positively associated with the language barrier in the firms’ home country. Also, linguistic complexity in firms’ conference calls affects the extent to which the capital market reacts to the information releases. Firms with more linguistic complexity in their conference calls show less trading volume and price movement following the information releases, after controlling for the actual earnings news. Further, the capital market’s response to linguistic complexity is more pronounced when there is greater implicit (as captured by the presence of foreign investors) or explicit (as captured by how actively analysts ask questions) demand for the English conference calls. This suggests that the form in which financial information is presented can impose additional processing costs by limiting investors’ ability to interpret the reported financials.

We examine how a manager’s ethnic cultural background affects managers’ communication with investors. Using a sample of earnings conference calls transcripts with 26,430 executives from 42 countries, we find that managers from ethnic groups that have a more individualistic culture (i) use a more optimistic tone, (ii) exhibit greater self-reference, and (iii) make fewer apologies in their disclosure narratives. Managers’ ethnic culture has a lasting effect on their narratives—the effects persist even for executives who are later exposed to different ethnic cultures through work experience. The effect of ethnic heritage is observed in dialogues that reflect real time interactions (i.e., Q&As) and less pronounced in the scripted, less spontaneous portion of the calls (i.e., management discussion). The capital market responds positively to optimistic tone yet does not distinguish between the optimism in tone of managers from different ethnic backgrounds. The findings suggest that managers’ ethnic backgrounds have a significant effect on how they communicate with the capital markets and how the markets respond to the disclosure event.