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Diversity, Disagreement, and Stock Price Crash Risk

We provide plausibly causal evidence for the role of cultural and linguistic diversity in stock price crash risk. Using unique data from China, we show that firms headquartered in linguistically diverse areas, instrumented by the extent of geographical isolation, have higher stock price crash risk, but not higher jump risk. The effect is more pronounced for stocks that are more likely to be held by local investors. Our evidence further shows that linguistic diversity is associated with investor disagreement, and not with companies’ fundamentals, propensities to hoard bad news, or innovation activities. Our results are consistent with models of investor disagreement.