Linguistic Diversity and Firms' Debt‐to‐Asset Ratio: Evidence From Chinese Dialects

ABSTRACT This paper uses the data from the Chinese Industrial Enterprises Database from 2004 to 2007 and combines it with the urban dialect‐differences index to empirically study how dialect differences affect a firm's debt‐to‐asset ratio. This paper discovers that linguistic diversity reduces a firm's debt‐to‐asset ratio, and such results remain valid after various robustness tests. Mechanism analysis indicates that dialect differences suppress the debt‐to‐asset ratio mainly by weakening the regional trust foundation rather than increasing communication costs. This paper uncovers the micro‐mechanism where dialect differences lead to trust depletion, which in turn shortens debt maturity, raises financing costs, and ultimately causes a decline in the debt‐to‐asset ratio. It offers a solution from the perspective of cultural institutions to break through regional financing barriers.