Corporate speak takes on new meaning in a research study co-authored by CEIBS Professors Shimin Chen and Henrik Cronqvist that looks at how language structure influences corporate decision-making. The researchers have applied what is known as the relativity principle – the idea that our native language influences our behaviour and decision making – to corporate finance. Their study compares the corporate cash holdings of firms based in countries where the grammar rules of the native language require speakers to refer to the future with constructs such as “will” or “be going to” with those based in countries where the native language does not require speakers to distinguish between the future and the present.

For example, if asked what they will do this coming Sunday afternoon, an English speaker would respond, “I will go to the theatre” while a Chinese speaker would respond “Wŏ qù jùyuàn” – “I go theatre”. Besides English, French, Spanish, Italian, Greek, Russian, Vietnamese and Thai are among languages that linguists classify as strong future time reference (FTR) languages, while German, Japanese, Portuguese and Swedish, along with Chinese, are among those considered weak-FTR languages.

The results of the study show a strong relation between language and cash policy. The average firm based in a weak FTR language environment holds about 39.6% more cash than the average firm based in a strong FTR language environment. Similarly, the researchers found that firms in countries where the native language has relatively fewer verbs or sentences that grammatically reference the future hold more cash. The results were the same even when controlling for economic development, legal environment and the effects of colonization. The researchers also found that Hong Kong firms increased their cash holdings as Chinese became the more predominant language for conducting business there following the region’s handover from the UK to China in 1997. They also looked closely at companies in Switzerland, which has four official languages: German, French, Italian and Romansh. French, Italian and Romansh are classified as strong-FTR languages, and the researchers found that firms headquartered in regions where those languages predominate had less cash holdings than firms headquartered in regions where German was the official language.

Firms’ cash holdings are largely precautionary – they are mostly intended as a cushion in the event that other sources of financing for ongoing projects and new investments will either become unavailable or too costly. Considering their findings within the context of prior research on the relativity principle (which is sometimes referred to as the “Sapir-Whorf Hypothesis”), the researchers believe that firms in different language environments behave differently in cash holding because language affects time perception. Speaking about the future in the present tense leads firms in a weak FTR language environment either to perceive future adverse credit events as more imminent or to form less precise beliefs about the timing of these future events, both of which would result in larger precautionary cash holdings when corporate decision-makers are risk-averse.

The results of the study appear in the paper titled “Languages and Corporate Cash Holdings: International Evidence”. The authors are CEIBS Associate Dean and Professor of Accounting Shimin Chen, CEIBS Zhongkun Group Chair Professor of Finance Henrik Cronqvist, Serene Ni, International Research Fellow at CEIBS, and Frank Zhang of Murdoch University in Australia.