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How do credit default swap spreads react to languages?

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  • Huang, Hung-Yi

Abstract

Speakers of weak-future-time-reference (FTR) languages (e.g., Chinese) do not grammatically distinguish between present and future events, unlike those of strong-FTR languages (e.g., English). Notably, strong-FTR languages correlate with more myopic financial behaviors and higher credit default swap spreads. Using a comprehensive sample of firms in 59 countries covering the period from 1995 to 2020, I find that countries with strong-FTR languages exhibit a significantly higher credit risk. However, this effect weakens in nations with robust formal institutions with superior disclosure quality, high information transparency, and stable governance, among others. In the banking sector, strong-FTR-language environments are associated with greater managerial risk-taking. These findings highlight language as an informal institutional factor that shapes financial decision-making, offering novel insights into credit risk heterogeneity.

Suggested Citation

  • Huang, Hung-Yi, 2025. "How do credit default swap spreads react to languages?," Pacific-Basin Finance Journal, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:pacfin:v:94:y:2025:i:c:s0927538x2500280x
    DOI: 10.1016/j.pacfin.2025.102943
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    JEL classification:

    • F39 - International Economics - - International Finance - - - Other
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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