Language Commonality and Sell-Side Information Production

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. This paper was accepted by Gustavo Manso, finance.