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How language shapes bank risk taking

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Abstract

We analyze the impact of language on risk-taking behavior of banks. Languages that grammatically distinguish between present and future events make the future feel more distant than the present and as thus favor a less future-oriented behavior (Chen, American Economic Review, 2013). Our hypothesis is that these languages lead banks to take more risk since they reduce the perception of potential losses associated with risky activities. We investigate this hypothesis on a sample of 1401 banks from 81 countries over the 2010–2017 period. We perform random effects regressions of bank risk, measured by the Z-score, on the type of language. We find that banks from countries with future tense marking take more risk in accordance with our prediction. This finding is robust to the inclusion of alternative culture indicators, to alternative definitions of bank risk and of future time reference. We also observe that future tense marking is associated with greater occurrence of banking crises. Our conclusion is thus that language contributes to explain the cross-country differences in bank risk-taking.

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Notes

  1. English speakers can sometimes speak about future events with a non-future tense verb (for e.g. “the teacher arrives tomorrow”). However, as documented by Copley (2009), this way of speaking is only used when speakers want to talk about planned/scheduled/habitual events, or events arising from law-like properties of the world.

  2. It is worth noting that Germans can make reference to the future with the future tense marker “werden”. However, in German, like in other weak-FTR languages, speakers are not required to use this future tense marker every time they talk.

  3. See Lancaster (2000) for a review of the incidental parameter problem.

  4. For example, the 2017 Corruption Perception Index is constructed using 13 different data sources from 12 institutions, such as African Development Bank, Work Bank, World Economic Forum, and among others.

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Authors and Affiliations

  1. University of Strasbourg, Strasbourg, France

    Francis Osei-Tutu

  2. EM Strasbourg Business School, University of Strasbourg, Strasbourg, France

    Laurent Weill

  3. Moscow State of International Relations, MGIMO University, Moscow, Russia

    Laurent Weill

Authors
  1. Francis Osei-Tutu
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  2. Laurent Weill
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Correspondence to Laurent Weill.

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Appendix

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Table 10 Definitions and sources of variables
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Osei-Tutu, F., Weill, L. How language shapes bank risk taking. J Financ Serv Res 59, 47–68 (2021). https://doi.org/10.1007/s10693-020-00335-8

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