Institutional determinants of households’ financial investment behaviour across European countries

Abstract

In this paper, we examine the influence exerted by formal and informal institutions on financial investment behaviour across households from 25 European countries. Our results reveal that people from former communist countries are less likely to make such financial decisions, while the same relationship holds for those who lived in countries that adopted either gradual or shock-therapy policies on the transition to capitalism. Our results reveal that institutional factors are associated with the propensity to invest in financial instruments. Specifically, our results show that the shorter the period of exposure individuals have had to a socialist system, the greater their intensity to invest in the stock market. Moreover, weak institutional frameworks and low quality of governance are generally linked to a lower likelihood that an individual will make financial investments in shares or stocks, with the effect being magnified in former communist countries. In addition, we find that households in Protestant countries are more likely to have investments in financial instruments compared to their Orthodox and Catholic peers, but the impact is diminished in former communist countries. Last but not least, different fractionalization indices affect the investment decisions differently, while different national cultural values and dimensions are significant variables that can shape these behaviours.