Language in Economics and Accounting Research: The Role of Linguistic History

Abstract

This paper investigates whether a consideration of linguistic history is important when studying the relationship between economic and linguistic behaviours. Several recent economic studies have suggested that differences between languages can affect the way people think and behave (the linguistic relativity or Sapir-Whorf hypothesis). For example, the way a language allows one to talk about the future might influence future-oriented decisions (Chen, 2013), such as a company’s earnings management (Kim et al., 2017; Cheng et al. 2019). However, languages have historical relations which lead to shared features, meaning that they do not constitute independent observations. This can inflate correlations between variables if not dealt with appropriately (Galton’s problem). We discuss this problem and provide an overview of the latest methods for controlling for linguistic history. We then provide an empirical demonstration of how the Galton’s problem can bias results in an investigation of whether a company’s earnings management behaviour is predicted by structural features of the language of its employees. We find a strong relationship when not controlling for linguistic history, but the relationship disappears when controls are applied. In contrast, economic predictors of earnings management remain robust. Overall, our results suggest that a careful consideration of linguistic history is important for distinguishing true causes from spurious correlations in economic behaviors.