Now is the Time: The Impact of Linguistic Time Reference on Corporate Default Risk

Kung-Cheng Ho (), Yiling Chen (), Dezhu Ye () and Cheng Yan
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Kung-Cheng Ho: Pearl River Delta Collaborative Innovation Center of Scientific Finance and Industry School of Finance, Guangdong University of Finance and Economics, 21 Luntou Road, Guangzhou 510320, Guangdong, P. R. China
Yiling Chen: Faculty of Business and Economics, University of Hong Kong, Pok Fu Lam, Hong Kong SAR
Dezhu Ye: Jinan University, 601 West Huangpu Avenue, Tianhe District, Guangzhou City, Guangdong, P. R. China
Cheng Yan: Department of Finance, Essex Business School, University of Essex, Wivenhoe Park, Colchester, CO4 3SQ, United Kingdom

The International Journal of Accounting (TIJA), 2023, vol. 58, issue 04, 1-41

Abstract: SynopsisThe research problemThis paper assesses whether and how people’s perceptions of time — strong future time reference (FTR) versus weak FTR — affect corporate default risk.Motivation or theoretical reasoningStudies have shown that default risk varies across firms, regions, and countries, highlighting the need for a comprehensive understanding of the contributing factors. Traditional studies focus on how firm-level, industry-level, national and international economic and financial variables shape corporate default risk, but they fail to explain cross-country and cross-regional differences in corporate default risk from the perspective of informal institutions, particularly, language. This study takes the first step to examine whether and how future-oriented language shapes corporate default risk.The test hypothesesWe first tested whether strong-FTR language decreases corporate default risk. We further tested whether the effect of strong-FTR language on default risk depends on firms’ level of information transparency. In addition, we tested whether the effect of strong-FTR language on default risk depends on a country’s disclosure requirements. Lastly, we tested whether the effect of strong-FTR language on default risk depends on a country’s control of corruption.Target populationWe find that corporate default risk is significantly higher in regions dominated by speakers of weak-FTR languages, using a comprehensive sample of firms in 36 countries with 180,013 observations spanning from 1988 to 2017.Adopted methodologyOrdinary least square regressions were used in this study.AnalysesCorporate default risk is measured by two proxies of firm probability of default, following Merton [(1974) Journal of Finance, 29(2), 449–470] and Lee and Lin [(2012) Journal of International Financial Markets, Institutions, and Money, 22(4), 973–989]. Our independent variable is Strong FTR, which equals 1 if a language belongs to the strong-FTR language family, as defined by the European Science Foundation’s Typology of Languages in Europe (EUROTYP) project. If a language does not require “obligatory [FTR] use in (main clause) prediction-based contexts†[Dahl (2000)Tense and Aspect in the Languages of Europe, O. Dahl (Ed.), pp. 309–328], then we put this language into the weak-FTR group. On the other hand, if a language does have the above-mentioned requirement, then it belongs to the strong-FTR group.FindingsWe found that corporate default risk is significantly higher in regions dominated by speakers of weak-FTR languages. Furthermore, the FTR effect on default risk is weakened in countries with stronger formal institutions (e.g., high disclosure quality, greater transparency, and less corruption). Our results introduce a new explanation for heterogeneity in corporate default risk, provide insights about whether language is an economic institution, and adds to research on the effects of languages on economic and financial outcomes.

Keywords: Language; default risk; economic institution; future-time reference (search for similar items in EconPapers)
JEL-codes: F39 G14 G28 G33 M41 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S1094406023500105

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