How does language impact foreign investing in a multilingual country?

Several papers have already highlighted that retail investors tend to favor stocks listed in countries that share a common language. We confirm previous results but unlike precedent papers we provide evidence that the difference of languages within the same country matters to understand foreign investing. We study the common language effect by distinguishing the two language groups that compose the Belgian population. We investigate whether the language difference between the French- and Dutch-speakers induces differences in their investment behavior. Our results support our hypothesis by showing that French(Dutch) stocks are more traded by the French(Dutch)-speaking investors. We provide evidence that the common language effect remains significant after controlling for the gender, age, level of education and financial literacy. More importantly, we show that investors with a higher level of education tend to be less affected by the common language effect. In addition, we show that the common language effect is reduced for firms not included in a national stock index. Presumably due to international coverage, French (Dutch) stocks listed in a national stock index tend to attract more investors whose native language is not French (Dutch). Finally we find that the preference for stocks listed in countries that share the same language doesn't seem to be information-driven. The French(Dutch)-speaking investors are not able to generate significantly positive net profits on these stocks and are rather suspected to display a behavioral bias.