Research by Elliott, Rennekamp, and White (2015) (hereafter, "ERW") finds that investors are more willing to invest in a firm when concrete rather than abstract language is highlighted in a disclosure, particularly when a firm feels more psychologically distant. ERW documents these effects in a setting where investors exhibit local bias, or the tendency to favor domestic firms that are headquartered closer to an investor. In this paper, we extend ERW to examine the effects of highlighting concrete language on home bias (i.e., the tendency for investors to favor domestic firms over foreign firms). Home bias and local bias are likely both driven, in part, by feelings of psychological distance. However, in addition to this behavioral-based explanation for both biases, prior literature outlines a number of information-based explanations for home bias that differ from explanations for local bias. Thus, it is an empirical question as to whether highlighting concrete language might overcome these information-based explanations and help to mitigate home bias. In this study, we predict and find that highlighting concrete language in disclosures increases willingness to invest in foreign firms, consistent with a reduction in psychological distance mitigating home bias. Our paper addresses calls for more replication, and provides convergent evidence on the results in ERW. We also provide evidence that home bias is driven, in part, by non-information-based psychological distance, and suggest a tool-highlighting concrete language-that firms can use to attract foreign investors.
Can Concrete Language Help to Mitigate the Home Bias in Equity Investing? An Extension of Elliott, Rennekamp, and White (2015)
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W. Brooke Elliott, Kristina M. Rennekamp, Brian J. White; Can Concrete Language Help to Mitigate the Home Bias in Equity Investing? An Extension of Elliott, Rennekamp, and White (2015). Journal of Financial Reporting doi: https://doi.org/10.2308/jfr-2018-0024
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