The cultural proximity effect on retail investors' foreign investing:A disaggregated analysis of the Belgian French- and Dutch-speaking investors

In this paper, we investigate the influence of cultural proximity on retail investors' foreign investing. Several papers have already highlighted that retail investors tend to favor stocks listed in culturally close countries. Unlike precedent papers, we provide evidence that the difference of culture within a same country matters to understand foreign investing. We indeed study the cultural proximity effect by distinguishing the two language groups that compose the Belgian population. We investigate whether the cultural difference between French- and Dutch-speaking induces differences in their investment behavior. Our results support our hypothesis by showing that French(Dutch) stocks are more traded by French(Dutch)-speaking investors. More importantly, we show that the preference for culturally close stocks is not due to superior information but because of a bias. In the second part, we investigate whether the cultural proximity effect varies across investors' and firms characteristics. As for investors' characteristics, our results suggest that a highly sophisticated older male investor displays a higher trading activities on culturally close countries. Concerning firms' characteristics, we show that the inclusion of a French(Dutch) stock in a stock index reduces significantly the cultural proximity effect. It may suggest that stocks in a national stock index tend to attract more foreign investors in general and not particularly culturally close foreign investors.