How does linguistic diversity matter? The case of trade credit

Abstract

Language, as an important cultural carrier and communication tool, plays an important role in commercial and trading activities. We provide a novel evidence on the impact of linguistic diversity on corporate trade credit by exploiting the data of Chinese dialects. Using a sample of Chinese listed companies from 2008 to 2021, we find that there is a negative correlation between linguistic diversity and the usage of trade credit. The mechanism analysis shows that supplier concentration, formal legal environment and social trust help to overcome language barriers and reduce the risk of default, thus weakening the negative impact of linguistic diversity on trade credit. Moreover, developed financial systems will weaken the negative impact of linguistic diversity on trade credit. This study not only enriches our understanding about the determinants of trade credit from the perspective of language but also provides insights on the impact of language on corporate behavior.