Beyond “lost in Translation”: Cultural Proximity and the Processing of Financial Information

We examine how a shared cultural background between analysts and firms under coverage affects information asymmetry in financial markets. To disentangle cultural proximity from geographic proximity, we extract a sample of firms publicly traded in the U.S. but are headquartered in regions sharing Chinese culture (“Chinese firms”), and identify a group of U.S. analysts of Chinese ethnic origin. We find that analysts of Chinese ethnicity provide more accurate forecasts about Chinese firms’ earnings. The effect of cultural proximity on analyst forecast precision is more pronounced among first-generation Chinese immigrants. Market reaction is stronger if analysts of Chinese ethnicity revise their forecasts upwards or issue favorable recommendations about a Chinese firm. Our results indicate that culture proximity mitigates information asymmetry that adversely affects foreign firms, especially those from emerging markets.