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Is language priced? evidence from bank loan contracting

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  • Yalu Xie
  • Chong Wang
  • Feng (Harry) Wu

Abstract

Previous studies document that firms in countries speaking languages with strong future time reference (FTR), which more sharply dissociates the future from the present, engage in less future-oriented corporate behaviors relating to their default and information risks. We find that strong FTR influences creditors’ pricing of bank loan contracts: banks design more unfavorable loan terms to strong-FTR borrowers, including larger loan spread, higher likelihood of collateral requirement, and more covenants. This effect can be mitigated by a country’s strong governance. We confirm that strong FTR is associated with higher default and information risks of borrowing firms. Overall, our findings suggest that language represents a distinctive risk to banks which is priced in the loan market.

Suggested Citation

  • Yalu Xie & Chong Wang & Feng (Harry) Wu, 2023. "Is language priced? evidence from bank loan contracting," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 30(3), pages 745-768, May.
  • Handle: RePEc:taf:raaexx:v:30:y:2023:i:3:p:745-768
    DOI: 10.1080/16081625.2021.2003211
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