Cultural Proximity and the Processing of Financial Information

Qianqian Du, Frank Yu and Xiaoyun Yu

Journal of Financial and Quantitative Analysis, 2017, vol. 52, issue 6, 2703-2726

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.

Date: 2017
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