Identifying the determinants of systemic risk contributes to global financial stability. However, the role of language in such risk remains underexplored. This study investigates how a future time reference (FTR) language shapes firms’ systemic risk, measured by the Basel II/III ARIB (advanced internal rating approach) framework, in 41 countries and areas spanning the period 1985–2018. The empirical results reveal that strong FTR language reduces systemic risk. The results are robust when controlling for endogeneity concerns with instrumental variables, generalized method of moments (GMM), and high‐dimensional fixed effects, as well as when eliminating concerns related to enormous economies and financial firms. Furthermore, we investigate how formal and informal institutions interact with the FTR language on firms’ systemic risk. The empirical results indicate that well‐developed formal and informal institutions that mitigate adverse selection and moral hazard issues also mitigate the negative role of FTR language in their systemic risk. This study contributes to the literature by exploring whether linguistic ambiguity amplifies firms’ systemic risk and improves systemic risk management across regions with heterogeneous formal and informal institutions.
Ho et al. (Tue,) studied this question.