Abstract
This study investigates the economic consequences of non-English-speaking companies adopting English as an external reporting language. We examine a sample of European companies that initiate the voluntary issuance of an annual report in English in addition to the local language annual report. To control for self-selection, we use a difference-in-differences design with a propensity score matched control sample. We find that adoption of English as an external reporting language is associated with increased foreign ownership, decreased information asymmetry, and increased analyst following. We also find that these benefits are not conditional on the use of IFRS for financial reporting. Our findings hold if we run a number of robustness checks to control for correlated events (creation of an investor relations service, provision of conference calls, and/or changes in management). These results are consistent with the language used in the annual report acting as a barrier to investment for some investors and with annual reports issued in English reducing investors’ information processing costs.
Similar content being viewed by others
Notes
Source: http://www2.ignatius.edu/faculty/turner/languages.htm, last retrieved: 30 April 2014.
Source http://www.world-exchanges.org/statistics, last retrieved: 30 April 2014.
The Global Reports database is part of Infinancials (http://www.infinancials.com) which covers more than 70,000 listed active companies around the world and aggregates data from WVB, Factset, Thomson Reuters, and Morningstar. The Global Reports database provides access to annual and interim reports for more than 40,000 global companies from 126 countries.
Although Switzerland does not belong to the European Union, it is included in our sample because it is part of the European Free Trade Association and is highly integrated with the European Union.
To address concerns related to the effect of IFRS adoption on our outcome variables, we use three approaches: First, we include an IFRS indicator variable in the selection model used to match treatment companies with control companies. The treatment and control companies do not statistically differ from each other with regard to the use of IFRS. Second, the difference-in-differences design further controls for any potential confounding effects due to IFRS adoption since all European companies are affected by the transition to IFRS at the same time. Third, we include an IFRS indicator variable in our main analyses. The indicator is generally statistically insignificant in all model specifications.
For this panel, we require sampled companies to be present from 2004 to 2007, our period of investigation, because we want to avoid biases arising from changes in the sample composition (e.g., delisting, IPOs … ).
Annual reports were collected from the http://www.infinancials.com website, or if unavailable, from the companies’ websites. We manually validated the annual report language designated in Infinancials on companies’ websites. We further randomly checked other companies’ websites for non-issuance of annual reports in English if so indicated by Infinancials. We found no inconsistencies.
Foreign companies listed in the United States must prepare a 20-F form in English. Although the separate annual report may be published in the local language, foreign investors could perhaps use the 20-F form as the source of information (see Lang, Lins, & Miller, 2003). We also ran our analysis including companies listed in the United States or United Kingdom; the findings are robust to the inclusion of these companies in our sample.
We checked disclosure and transparency requirements for each stock exchange segment and excluded companies that were or became obliged to publish an annual report in English.
As Germany represents almost a quarter of treatment firms, we reran the main regression model of Table 7 excluding this country and results are qualitatively unchanged.
The IFRS variable can take the zero value. Specifically, 17% (78%) of companies used IFRS in 2004 (2005) and this percentage increases in 2006 and 2007. We note that some companies do not present consolidated financial statements and that some are exempt from adopting IFRS (e.g., companies using US GAAP until 2007/2008). We also note that the use of IFRS does not differ significantly between the treatment and control companies.
The sample period of time the study examines closely overlaps with mandatory IFRS adoption in Europe. We know that mandatory IFRS adoption coincided with a lot of regulatory changes in Europe (because it was part of the Financial Services Action Plan, FSAP, of the European Union). A number of studies argue that the concurrent changes in enforcement in Europe drive the results in most mandatory IFRS adoption papers (see Christensen et al., 2013). By matching with control firms in the same country this study controls for this issue. We thank one reviewer for pointing to this idea.
The use of alternative benchmarks, such as (a) all companies that do not use English in their annual reports from the same country, or (b) all companies that already use English in their annual reports from the same country, is not possible, due to data availability limitations.
Please note again that we compare treatment companies with the whole universe of companies. This universe consists of English and non-English reporting companies.
Concerning Switzerland and Belgium, which are multilingual countries, we chose the language spoken by the majority of the population: German for Switzerland (http://www.swissworld.org/en/people/language/language_distribution) and Dutch (Flemish) for Belgium (http://www.nationmaster.com/country/be-belgium/lan-language). We reran the main regression model of Table 7 excluding these two countries and results are qualitatively unchanged.
As a robustness test, we used total trading volume (in Euros to avoid the effects of exchange rates volatility over the period) as a direct measure of liquidity. Findings are similar to those reported with bid–ask spread and zero-return days: treatment firms experience a significant increase in trading volume after the adoption. Such is not the case for control firms. As a consequence, the difference-in-differences is significant.
It would be interesting to identify financial analysts (with respect to factors such as nationality, employer, etc.) in order to test whether companies are able to attract more UK- or US-based analysts by issuing an annual report in English. However, this is not possible as I/B/E/S has eliminated the ability to match analysts with their employers.
Each pair includes a treatment and the matched control firm.
In unreported tables, we also clustered standard errors at the firm level, while removing fixed effects on industry and firm. Significance levels are overall unchanged.
We note, however, that prior research does not support this assertion. Campbell, Cornelia Beck, and Shrives (2005), for instance, perform a content analysis of voluntary disclosure in an international comparison context. They record word and sentence counts, using both original German documents and their English translations published by German companies. They find that the English rendering of German environmental narratives is generally faithful to the German, suggesting that there is no difference in content between the local-language annual report and the English annual report.
The firm fixed effect is measured as a pair of firms (treatment+control) and not by firm. Consequently, there is no multicollinearity issue between the Treatment variable and our firm-pair fixed effect. As a robustness test, we rerun Table 7 as follows: (a) we remove the firm-pair fixed effects. We add country fixed effects. In total, we have fixed effects by year, industry and country. Results are similar to those reported in Table 7. (b) In an alternative setting, we remove Treatment from the regression while keeping firm fixed effects as in DeFond, Hu, Hung, and Li (2011). Once again, the sign, magnitude and significance of the coefficients of interest (Time and Treatment × Time) are similar. We thank one reviewer for pointing to this possibility.
In untabulated findings, we show that the new foreign investors do not speak the local language. It suggests that adopting an annual report in English is a powerful tool to attract foreign shareholders outside the local language community (e.g., an Austrian company may attract shareholders beyond the German-speaking community by adopting an annual report in English).
We do not include the control variable “Quantity of information” because we do not have access to all the annual reports for this time period (1998–2001).
Another additional test would have been to carry out an analysis on a non-European sample (e.g., of South-American or Asian firms). We rule out this possibility given the relatively small sample size of English adopters in those countries. In addition, many restrictions to foreign investments in listed firms exist in some of these countries, especially in South American and Asian countries (World Bank Group staff, 2010).
An alternative strategy would be to use an instrumental variable approach; however, this creates several problems. First, it is nearly impossible to find an appropriate instrumental variable at the firm-level since the instrumental variable would have to be uncorrelated with each outcome variable. While Jeanjean et al. (2010) have identified country-based variables that are highly correlated with the decision to issue an English annual report, these country-level variables are not appropriate as instrumental firm-level variables. Second, an instrumental variable approach rules out the possibility of using a difference-in-differences design in conjunction with a propensity matched control sample. We believe, however, that this combination allows us to better control for confounding factors and events that may have an impact on the selection decision and the outcome variables.
We also tried to collect data on companies’ Internet presentations (do companies have a web page, and if yes, does it also exist in English?). The sources, which we identified to gather the latter information were, however, not reliable. For many companies this data was not available at all, while it was inconsistent for others.
We also interacted the Investor relations variable with Time (i.e., Investor relations × Time), and with Time × Treatment (i.e., Investor relations × Time × Treatment) and included all main and interaction effects in the regression. In untabulated results, all three coefficients are insignificant. Hence the benefits of issuing an annual report in English are not conditional on the creation of an investor relations service.
We are aware that this assumption is debatable. However, we are unable to find a better proxy for managers’ local-language knowledge.
References
Ali, A., Chen, T.-Y., & Radhakrishnan, S. 2007. Corporate disclosures by family firms. Journal of Accounting & Economics, 44 (1/2): 238–286.
Altamuro, J., & Beatty, A. 2010. How does internal control regulation affect financial reporting? Journal of Accounting & Economics, 49 (1/2): 58–74.
Arya, A., & Mittendorf, B. 2007. The interaction among disclosure, competition between firms, and analyst following. Journal of Accounting & Economics, 43 (2/3): 321–339.
Ashbaugh, H., & Pincus, M. 2001. Domestic accounting standards, international accounting standards, and the predictability of earnings. Journal of Accounting Research, 39 (3): 417–434.
Ashbaugh-Skaife, H. A., Gassen, J., & LaFond, R. 2006. Does stock price synchronicity represent firm-specific information? The international evidence. MIT Sloan Research Paper No. 4551-05, http://ssrn.com/abstract=768024.
Bae, K.-H., Stulz, R. M., & Tan, H. 2008a. Do local analysts know more? A cross-country study of the performance of local analysts and foreign analysts. Journal of Financial Economics, 88 (3): 581–606.
Bae, K.-H., Tan, H., & Welker, M. 2008b. International GAAP differences: The impact on foreign analysts. The Accounting Review, 83 (3): 593–628.
Baker, H. K., Nofsinger, J. R., & Weaver, D. G. 2002. International cross listing and visibility. Journal of Financial and Quantitative Analysis, 37 (3): 595–621.
Ball, R. 2006. International financial reporting standards (IFRS): Pros and cons for investors. Accounting and Business Research, 36 (S1): 5–27.
Barker, R. G. 1998. The market for information – Evidence from finance directors, analysts and fund managers. Accounting and Business Research, 29 (1): 3–20.
Bekaert, G., Harvey, C. R., & Lundblad, C. 2007. Liquidity and expected returns: Lessons from emerging markets. Review of Financial Studies, 20 (6): 1783–1831.
Bekaert, G., Harvey, C. R., Lundblad, C. T., & Siegel, S. 2010. The European union, the euro, and equity market integration. Working paper, SSRN, http://ssrn.com/abstract=1573308.
Beneish, M. D., & Yohn, T. L. 2008. Information friction and investor home bias: A perspective on the effect of global IFRS adoption on the extent of equity home bias. Journal of Accounting and Public Policy, 27 (6): 433–443.
Bonaccorsi, A. 1992. On the relationship between firm size and export intensity. Journal of International Business Studies, 23 (4): 605–635.
Bradshaw, M. T., Bushee, B. J., & Miller, G. S. 2004. Accounting choice, home bias, and US Investment in non-US firms. Journal of Accounting Research, 42 (5): 795–841.
Brochet, F., Naranjo, P. L., & Yu, G. 2012. Causes and consequences of linguistic complexity in non-US firm conference calls. Harvard Business School Research Paper No. 2154948, http://ssrn.com/abstract=2154948.
Bushee, B. J., Matsumoto, D. A., & Miller, G. S. 2003. Open versus closed conference calls: The determinants and effects of broadening access to disclosure. Journal of Accounting and Economics, 34 (1–3): 149–180.
Bushee, B. J., & Miller, G. S. 2012. Investor relations, firm visibility, and investor following. The Accounting Review, 87 (3): 867–897.
Campbell, D., Cornelia Beck, A., & Shrives, P. 2005. A note on comparative language interrogation for content analysis: The example of English vs German. British Accounting Review, 37 (3): 339–350.
Chang, L. S., & Most, K. S. 1985. The perceived usefulness of financial statements for investors decisions. Miami, FL: Florida International University Press.
Cheng, S., & Xu, X. 2006. The role of peer performance in managerial compensation surrounding the 1996 telecommunications act. Journal of Accounting and Public Policy, 25 (5): 596–608.
Christensen, H. B., Hail, L., & Leuz, C. 2013. Mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics, 56 (2–3, Supplement 1): 147–177.
Covrig, V. M., DeFond, M. L., & Hung, M. 2007. Home bias, foreign mutual fund holdings, and the voluntary adoption of international accounting standards. Journal of Accounting Research, 45 (1): 41–70.
Dahlquist, M., & Robertsson, G. 2001. Direct foreign ownership, institutional investors, and firm characteristics. Journal of Financial Economics, 59 (1): 413–440.
Daske, H., Hail, L., Leuz, C., & Verdi, R. S. 2008. Mandatory IFRS reporting around the world: Early evidence on the economic consequences. Journal of Accounting Research, 46 (5): 1085–1142.
De Franco, G., Hope, O.-K., Vyas, D., & Zhou, Y. 2014. Analyst report readability. Contemporary Accounting Research. advance online publication. 28 July. doi: 10.1111/1911-3846.12062.
DeFond, M., Hu, X., Hung, M., & Li, S. 2011. The impact of mandatory IFRS adoption on foreign mutual fund ownership: The role of comparability. Journal of Accounting and Economics, 51 (3): 240–258.
Dehaan, E., Hodge, F., & Shevlin, T. 2013. Does voluntary adoption of a clawback provision improve financial reporting quality? Contemporary Accounting Research, 30 (3): 1027–1062.
Diamond, D. W., & Verrecchia, R. E. 1991. Disclosure, liquidity and the cost of capital. Journal of Finance, 46 (2): 1325–1359.
Dvorak, T. 2005. Do domestic investors have an information advantage? Evidence from Indonesia. Journal of Finance, 60 (2): 817–839.
Ferreira, M. A., & Matos, P. 2008. The colors of investors’ money: The role of institutional investors around the world. Journal of Financial Economics, 88 (3): 499–533.
Frankel, J., & Rose, A. 2002. An estimate of the effect of common currencies on trade and income. Quarterly Journal of Economics, 117 (2): 437–466.
French, K. R., & Poterba, J. M. 1991. Investor diversification and international equity markets. American Economic Review, 81 (2): 222–226.
Gehrig, T. 1993. An information based explanation of the domestic bias in international equity investment. Scandinavian Journal of Economics, 95 (1): 97–109.
Graham, J. R., Harvey, C. R., & Huang, H. 2009. Investor competence, trading frequency, and home bias. Management Science, 55 (7): 1094–1106.
Grinblatt, M., & Keloharju, M. 2001. How distance, language, and culture influence stockholdings and trades. Journal of Finance, 56 (3): 1053–1073.
Hales, J., Kuang, X. I., & Venkataraman, S. 2011. Who believes the hype? An experimental examination of how language affects investor judgments. Journal of Accounting Research, 49 (1): 223–255.
Harzing, A. W., & Pudelko, M. 2014. Hablas vielleicht un peu la mia language? A comprehensive overview of the role of language differences in headquarters–subsidiary communication. International Journal of Human Resource Management, 25 (5): 696–717.
Hau, H. 2001a. Geographic patterns of trading profitability in Xetra. European Economic Review, 45 (4–6): 757–769.
Hau, H. 2001b. Location matters: An examination of trading profits. Journal of Finance, 56 (5): 1959–1983.
Healy, P. M., Hutton, A. P., & Palepu, K. G. 1999. Stock performance and intermediation changes surrounding sustained increases in disclosure. Contemporary Accounting Research, 16 (3): 485–520.
Heath, C., & Tversky, A. 1991. Preference and belief: Ambiguity and competence in choice under uncertainty. Journal of Risk and Uncertainty, 4 (1): 5–28.
Heckman, J. J. 1979. Sample selection bias as a specification error. Econometrica, 47 (1): 153–161.
Jeanjean, T., Lesage, C., & Stolowy, H. 2010. Why do you speak English (in your annual report)? The International Journal of Accounting, 45 (2): 200–223.
Kalev, P. S., Nguyen, A. H., & Oh, N. Y. 2008. Foreign versus local investors: Who knows more? Who makes more? Journal of Banking & Finance, 32 (11): 2376–2389.
Kim, J.-B., & Shi, H. 2012. Voluntary IFRS adoption, analyst coverage, and information quality: International evidence. Journal of International Accounting Research, 11 (1): 45–76.
Kim, O., & Verrecchia, R. E. 1991. Trading volume and price reactions to public announcements. Journal of Accounting Research, 29 (2): 302–321.
Klein, A. 2002. Economic determinants of audit committee independence. The Accounting Review, 77 (2): 435–452.
Lang, M. H., Lins, K. V., & Miller, D. P. 2003. ADRs, analysts, and accuracy: Does cross listing in the United States improve a firm’s information environment and increase market value? Journal of Accounting Research, 41 (2): 317–345.
Lang, M. H., & Lundholm, R. J. 1996. Corporate disclosure policy and analyst behavior. The Accounting Review, 71 (4): 467–492.
Lazear, E. P. 1999. Culture and language. Journal of Political Economy, 107 (6): S95–S126.
Lehavy, R., Feng, L., & Merkley, K. 2011. The effect of annual report readability on analyst following and the properties of their earnings forecasts. The Accounting Review, 86 (3): 1087–1115.
Lesmond, D. A., Ogden, J. P., & Trzcinka, C. A. 1999. A new estimate of transaction costs. Review of Financial Studies, 12 (5): 1113–1141.
Leuz, C., & Verrecchia, R. E. 2000. The economic consequences of increased disclosure. Journal of Accounting Research, 38 (3): 91–124.
Li, K., & Prabhala, N. R. 2007. Self-selection models in corporate finance. In B. E. Eckbo (Ed), Handbook of corporate finance: Empirical corporate finance 39–83. Amsterdam, The Netherlands: North-Holland (Elsevier).
Lundholm, R. J., Rogo, R., & Zhang, J. L. 2014. Restoring the tower of babel: How foreign firms communicate with US investors. The Accounting Review 89 (4): 1453–1485.
McCreevy, C. 2005. IFRS: No pain, no gain? European Commissioner for Internal Market and Services Speech 05-621, Brussels, October.
Merton, R. C. 1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42 (3): 483–510.
Miller, B. P. 2010. The effects of reporting complexity on small and large investor trading. The Accounting Review, 85 (6): 2107–2143.
Myers, S. C. 1977. Determinants of corporate borrowing. Journal of Financial Economics, 5 (2): 147–175.
Myers, S. C., & Majluf, N. S. 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13 (2): 187–221.
Nickerson, C. 2005. English as a lingua franca in international business contexts. English for Specific Purposes, 24 (4): 367–380.
Nickerson, C., & de Groot, E. B. 2005. Dear shareholder, dear stockholder, dear stakeholder: The business letter genre in the annual general report. In P. Gillaerts, & M. Gotti (Eds), Genre variation in business letters, 325–346. Bern: Peter Lang.
O’Brien, P. C., & Bhushan, R. 1990. Analyst following and institutional ownership. Journal of Accounting Research, 28 (3): 55–82.
Pagano, M., Roell, A. A., & Zechner, J. 2002. The geography of equity listing: Why do companies list abroad? Journal of Finance, 57 (6): 2651–2694.
Peltokorpi, V., & Vaara, E. 2012. Language policies and practices in wholly owned foreign subsidiaries: A recontextualization perspective. Journal of International Business Studies, 43 (9): 808–833.
Raffournier, B. 1995. The determinants of voluntary financial disclosure by Swiss listed companies. European Accounting Review, 4 (2): 261–280.
Rosenbaum, P. R., & Rubin, D. B. 1983. The central role of the propensity score in observational studies for causal effects. Biometrika, 70 (1): 41–55.
Sonney, F. 2009. Financial analysts’ performance: Sector versus country specialization. Review of Financial Studies, 22 (5): 2087–2131.
Tan, H. -T., Ying Wang, E., & Zhou, B. O. 2014. When the use of positive language backfires: The joint effect of tone, readability, and investor sophistication on earnings judgments. Journal of Accounting Research, 52 (1): 273–302.
Tenzer, H., Pudelko, M., & Harzing, A. W. 2014. The impact of language barriers on trust formation in multinational teams. Journal of International Business Studies, 45 (5): 508–535.
Tetlock, P. C., Saar-Tsechansky, M., & Macskassy, S. 2008. More than words: Quantifying language to measure firms’ fundamentals. Journal of Finance, 63 (3): 1437–1467.
Tucker, J. W. 2010. Selection bias and econometric remedies in accounting and finance research. Journal of Accounting Literature, 29 (1): 31–57.
Vergoossen, R. G. A. 1993. The use and perceived importance of annual reports by investment analysts in the Netherlands. European Accounting Review, 2 (2): 219–244.
Verrecchia, R. E. 1982. Information acquisition in a noisy rational expectations economy. Econometrica, 50 (6): 1415–1430.
Wang, S., Li, W., & Cheng, L. 2009. The impact of H-share derivatives on the underlying equity market. Review of Quantitative Finance and Accounting, 32 (3): 235–267.
Welker, M. 1995. Disclosure policy, information asymmetry, and liquidity in equity markets. Contemporary Accounting Research, 11 (2): 801–827.
White, H. 1980. A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48 (4): 817–838.
White, J. 2008. Speech by SEC staff: IFRS and US Companies: A look ahead. Financial Executives International Global Financial Reporting Convergence Conference, June 5. Available at: http://www.sec.gov/news/speech/2008/spch060508jww.htm.
World Bank Group staff. 2010. Investing across borders – Indicators of foreign direct investment regulation in 87 economies. Washington: The World Bank Group.
Acknowledgements
The authors are grateful to two anonymous reviewers and the Editor (David Reeb), Dan Collins, Jere Francis, Laurent Frésard, John Hand, Ayse Karaevli, Martin Messner, workshop participants at HEC Paris, the University of Trier, Paris Dauphine University, the INTACCT Paris Meeting, Stockholm School of Economics, ESSEC Business School, WHU–Otto Beisheim School of Management, HEC Montreal, University Carlos III and participants at the American Accounting Association Annual Meeting, European Accounting Association Annual Meeting, French Accounting Association and the International Accounting Section Midyear Meeting (Best Paper Award) for insightful comments. Hervé Stolowy expresses his thanks to the HEC Foundation for funding the research project F1102. Thomas Jeanjean, Hervé Stolowy and Michael Erkens acknowledge the financial support of the European Commission (INTACCT project, contract No. MRTN-CT-2006-035850). Teri Yohn acknowledges the generous support of the PricewaterhouseCoopers Faculty Fellowship. Hervé Stolowy is a member of the GREGHEC, CNRS Unit, UMR 2959. The authors are grateful to Infinancials (http://www.infinancials.com) and especially Florent Grauer for providing the data on annual reports for the purpose of this study. They acknowledge the research assistance of Emna Neifar.
Author information
Authors and Affiliations
Corresponding author
Additional information
Accepted by David Reeb, Area Editor, 1 May 2014. This article has been with the authors for two revisions.
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Jeanjean, T., Stolowy, H., Erkens, M. et al. International evidence on the impact of adopting English as an external reporting language. J Int Bus Stud 46, 180–205 (2015). https://doi.org/10.1057/jibs.2014.33
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1057/jibs.2014.33