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Cultural Proximity and the Processing of Financial Information

Published online by Cambridge University Press:  27 December 2017

Qianqian Du ,
Frank Yu  and
Xiaoyun Yu
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Abstract

This paper examines how culture affects information asymmetry in financial markets. We extract firms traded in the United States but headquartered in regions sharing Chinese culture (“Chinese firms”), and we manually identify a group of U.S. analysts of Chinese ethnic origin (“Chinese analysts”). We find that Chinese analysts issue more accurate forecasts on Chinese firms than non-Chinese analysts. The effect is stronger among firms with less transparent information environments. Further evidence suggests that cultural proximity can go beyond language commonality and analysts’ pre-existing channels for information. Market reaction is stronger when Chinese analysts issue favorable forecast revisions or upgrades about Chinese firms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 6 , December 2017 , pp. 2703 - 2726
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We are grateful for valuable comments from Jarrad Harford (the editor) and Hongping Tan (the referee) that helped greatly improve the paper. We thank Rajesh Aggarwal, Ken Ahern, Warren Bailey, Utpal Bhattacharya, Ing-Haw Cheng, Jess Cornaggia, Henrik Cronqvist, Sudipto Dasgupta, Phil Dybvig, Mariassunta Giannetti, Nandini Gupta, Thomas Hellmann, Harrison Hong, Ryan Israelsen, Bin Ke, Jeff Kubik, Alexander Ljungqvist, Chen Lin, Xiaoji Lin, Laura Xiaolei Liu, Timothy Loughran, David Ng, Giorgia Piacentino, Manju Puri, Denis Sosyura, Tracy Wang, John Wei, Fei Xie, Alan Yan, Deniz Yavuz, Eric Yeung, and seminar participants at Central University of Finance and Economics, Cheung Kong Graduate School of Business, Chinese University of Hong Kong, City University of Hong Kong, Hong Kong University, Hong Kong University of Science and Technology, Hong Kong Polytechnic University, Indiana University, Nanyang Technological University of Singapore, Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, Shanghai University of Finance and Economics, Singapore Management University, Southwest University of Finance and Economics, Tsinghua University, University of New South Wales, the 2013 Mitsui Finance Symposium on Labor and Finance, the 2013 China International Conference in Finance, the 2013 MIT Sloan Asia Conference in Accounting, the 2013 TCFA Best Paper Symposium, the 2014 FSU SunTrust Beach Conference, the 2014 LBS Summer Symposium, and the 2014 WFA Annual Meeting for helpful comments. We thank Nicholas Korsakov for editorial assistance and Wenqian Hu and Ran Yi for research assistance. F. Yu acknowledges generous research funding from CEIBS. X. Yu gratefully acknowledges financial support from the Arthur M. Weimer Fellowship and the National Natural Science Foundation of China, Grant No. 71172127.

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