Stock Market Participation Research Articles

Return predictability between industries and the stock market in China

AbstractWe examined the lead–lag relationship between industry portfolio returns and market returns in China, the largest emerging market, for the period 1993–2019. Using a bidirectional pairwise regression model, we found that the returns for banking and real estate not only predict market returns and returns for other industries but also predict industrial output growth. Since 2005, a shift in predictive ability from manufacturing to real estate has occurred, whereas banking has maintained consistent predictive power over the examined period. In the reverse direction, the stock market predicts the returns for mining and transportation. The predictive power of banking was amplified during the 2008 financial crisis; however, it decreased in 2015 due to turbulence in China's stock market. The market predictability of mining was enhanced in both periods. The in‐sample and out‐of‐sample tests suggest that certain industry predictability patterns remain to be exploited by China's stock market participants.

Why Was There More Household Stock Market Participation During the COVID-19 Pandemic?

Although the nation was experiencing an economic downturn due to the COVID-19 pandemic outbreak, we nonetheless observed an increase in household equity share value relative to both domestic market capitalization and retail investors’ trading volume. In this paper, we aim to interpret the reasons underlying this seemingly unexpected phenomenon. We investigate portfolio choices with stocks, bonds, and life annuities under an inverse S-shaped probability distortion function. The results indicate that people invest more heavily in risky assets and buy more annuities when reducing their savings in risk-free accounts, which is indeed consistent with the reality.

Life Satisfaction and Stock Market Participation

Prior literature finds mixed evidence on the relationship between life satisfaction and stock market participation. Using the broad U.S. household survey data from the Panel Study of Income Dynamics (PSID), we find that households with higher life satisfaction are less likely to invest in stocks. Our findings hold during both financial crisis and non-crisis periods and remain unaffected after conducting the robustness analysis to mitigate endogeneity concerns. Our findings enrich the literature that examines the effect of emotional factors on household financial behavior. Our study also highlights that life satisfaction is an important factor in understanding investing behavioral biases and thus helps explain stock market participation puzzle.

Herding Behavior of Ghana Stock Market Participants: A Daily Analysis

This study investigates the herding behavior of Ghana stock market participants and its impact on stock returns. Using panel data of 38 equities listed on the Ghana stock market, the data spans from 2011 to 2019. Fixed effect model was used for all estimations. Overall, the study results failed to indicate evidence of herding behavior in the Ghana stock market. This result further indicates that at low levels, the market participants herd but at higher levels, there is the absence of herding behavior. In bull market conditions, market participants act in unison only at high levels. The result validates the assumption of the rational asset pricing model.

Religious differences and households' investment decisions

AbstractThis study examines effects of religion on US households' investment decisions, with focusing on the two channels; individual religious belief and local religious culture. We find that Protestants are less likely to invest in stocks than nonreligious households. Catholics are more likely to participate in stock markets than nonreligious households, which is largely driven by Catholic households' greater wealth and older age. Moreover, a higher local Catholic–Protestant ratio (CPratio) is associated with greater stock market participation of the local households, regardless of their own religious preferences. Furthermore, we find that the local CPratio is associated with stock choices—the higher the CPratio, the riskier the stock portfolios. The findings are economically meaningful and they provide salient insights into theory and policy.

THE DEVELOPMENT OF RESEARCH FRAMEWORK FOR THE DECISION TO PARTICIPATE IN STOCK MARKET: A SYSTEMATIC REVIEW OF LITERATURES FROM 2011-2021

The purpose of this paper is to understand stock market participation among individual investors. This paper has established a descriptive systematic-analysis of the empirical literature from journal indexed by Scopus, ISI ad ERA with an emphasis on the conceptualization and antecedents of stock market participation. Based on the review of past literature, this paper suggested social alignment, fundamental stock literacy, trust on institution and stock value expectation that would relate to stock market participation. The recommended framework may serve as a practical guide for stock broking firm to understand the behaviour of individual investors, encourage participation in the stock market and aid in the development of marketing strategies in competitive market.

Early health, risk aversion and stock market participation

To examine the relationship between early health status and financial decisions in adulthood, we link information on birth weight in 1966 from the Northern Finland Birth Cohort to data from the Finnish Central Securities Depository over the period of 1995–2010. We find that persons predisposed to poor health status in early childhood (indicated by low birth weight) avoid participating in the stock market in adulthood, with a 10% increase in birth weight associated with a 1.9% increase in probability of participation. The link between birth weight and stock market participation is partially channeled by poor early health status being associated with higher risk aversion. Early health status is not significantly related to risk taking in terms of the stock portfolio’s composition.

What sustainability assurance services do institutional investors demand and what value do they give them?

PurposeThe purpose of this study is to analyse the role played by institutional investors in a firm’s decision to hire sustainability assurance services and to determine the benefits of sustainability assurance for the functioning of the capital market. This analysis is complemented by examining the quality of the sustainability assurance service that institutional investors demand.Design/methodology/approachThe authors selected a sample of 1,564 multinational firms from 2002 to 2017. Panel data logit and generalised method of moments (GMM) regressions were estimated to consider decisions about hiring sustainability assurance services or not, and the assurance quality indexes constructed by a checklist based on the academic literature, respectively.FindingsInstitutional pressures associated with the environmental and social impacts of a firm’s activities lead to the convergence of institutional investor attitudes towards corporate sustainability, so that, regardless of their investment horizon, they promote the hiring of sustainability assurance services by corporate boards, which favours analyst precision and a reduction in the cost of capital. Long-term (LT) institutional investors exert influence through a selection mechanism, whereas short-term (ST) institutional investors exert influence through their presence on the board. Once the company has decided to provide assurance about its sustainability report, both types of institutional investors promote a higher quality of such service, although this is not well valued by the stock market.Research limitations/implicationsThis paper extends research on the monitoring role of institutional investors into the sustainability assurance context. Researchers may benefit from this paper’s findings when they examine the factors that drive the hiring of sustainability assurance services and their characteristics. This paper also shows that sustainability assurance services are a significant weakness due to the lack of standardisation in comparison with financial auditing, which complicates the assessment of their quality by stock market participants, thereby penalising those companies that provide more complete sustainability assurance reports.Practical implicationsConsidering this paper’s findings, it seems advisable that regulators establish a normative framework to standardise sustainability assurance processes. The results can also be used as an orientation for both companies, to design their sustainability disclosure policies and regulators, to improve the running of the capital market.Social implicationsSustainability assurance services have a positive effect on the running of the capital market and improve external stakeholder decision-making by providing more reliable information, which, in turn, will favour the implementation of more sustainable actions that contribute to the attainment of sustainable development goals.Originality/valueThis is one of the first papers to analyse the effect of institutional ownership on a firm’s decision to hire sustainability assurance services and consider the effect of the institutional investors’ investment horizon – LT versus ST – and the channel – selection methods and/or active engagement – used by them to exert their influence. The authors also propose several measures of sustainability assurance quality to demonstrate the relevance of the contents of the assurance statement for the capital market in general and the institutional investors in particular.

The Impact of Medical Insurance on Household Stock Market Participation: Evidence From China Household Finance Survey.

This paper explores the impact of medical insurance on the possibility of household participation in the stock market and the portfolio share of equity, applying Probit, and Tobit models with the data from China Household Finance Survey (CHFS). The empirical results highlight that participating in medical insurance can significantly increase the possibility of households participating in the stock market and the portfolio share of equity, and have passed the robustness tests, including propensity score matching (PSM), altering estimation methods, replacing explained variables, and eliminating samples. Besides, heterogeneity analysis shows that the impact of medical insurance on household stock market participation is more significant in eastern region, urban areas, and households with higher income level. Further mechanism analysis implies that household participation in medical insurance mainly affects their stock market participation through preventive savings effect. It is necessary to improve the medical insurance system and encourage household participation in stock market so as to further promote financial development in China.

Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown

AbstractThis article studies the impact of retail investors on stock liquidity during the COVID-19 pandemic lockdown in spring 2020. Retail trading exhibits a sharp increase, especially among stocks with high COVID-19–related media coverage. Retail trading attenuated the rise in illiquidity by roughly 40% but less so for high-media-attention stocks. Causality is addressed using the staggered implementation of the stay-at-home advisory across U.S. states. The results highlight that ample free time and access to financial markets facilitated by fintech innovations to trading platforms are significant determinants of retail-investor stock market participation.

Does it pay to invest? The personal equity risk premium and stock market participation

Individuals’ stock market participation depends on the risk-return trade-off they expect to achieve. We find that the expected economic benefits of investing are highly heterogeneous. We define the personal equity risk premium (PERP) as the difference between an individual's expectation of returns and personal opportunity cost of capital. Higher PERP is associated with greater stock market participation. Our results hold after we control for known factors, such as financial literacy, trust, and loss aversion, and are stronger for the level of stock investment. Disentangling PERP shows that both components help explain both stock market participation and the level of participation.

Lottery preference and stock market participation: evidence from China

PurposeThis paper studies the effects of lottery preference on stock market participation at the macro level.Design/methodology/approachThe authors use the abnormal search volume intensity for lottery-related keywords from the Baidu search engine to capture retail investors' lottery preference. To measure stock market participation, they use five different macro-level measures from various angles. They perform the time series regression analysis in their empirical study.FindingsFirst, the validation tests show that the lottery preference index in this study is reasonable. Further, the authors find that lottery preference increases people's propensity to enter and trade in the stock market. Besides, they find that the effect on trading behavior is asymmetric, that is, high lottery preference has a more significant impact on trading behavior than low lottery preference. However, lottery preference has no significant effect on the stockholding.Originality/valueThis paper contributes to the growing literature that examines the determinants of stock market participation and the role of lottery/gambling preference in the financial market. It also provides direct and novel evidence for Statman's (2002) conclusions about the similarity of lottery players and stock traders.

Issuing opportunities of the Kazakhstan stock market: unrealized gains

The Kazakhstani economy has a significant emission potential. The study reveals the issues of the restraining influence on the development of Kazakhstani companies' emission activity. Among them are the role of bank lending in financing the national economy; government discouragement of economic development; weak efficiency of administrative and tax preferences for issuers. An important factor is the doubt of Kazakhstani companies on their capital fair evaluation in the market. In particular, the study noted that over the past five years, there has been a stable trend towards a decrease in bank lending as for large, the same is for small and medium-sized businesses. Basing on the continuing low number of new registrations of prospectuses for the issue of shares, there arises an issue of finding ways to meet the needs of business entities in financing. The findings from the analysis of sources of financing the State programs in the Republic of Kazakhstan showed the amount of possible funding from the stock market instruments. The study of data over the past few years made it possible to conclude that the methods and ways of using funds allocated under these state programs actually discourage business and local governments to use the emission potential that Kazakhstani market participants currently have. Administrative and tax preferences that operate in Kazakhstan for domestic participants in the stock market are either mainly aimed at investors or rather incomprehensible and imperceptible for potential issuers. Uncertainty in achieving the planned funding levels and in a fair assessment of the company's capital cost, basing on the above factors identified as a result of the study, is the main constraining reason for the low emission activity of Kazakhstani stock market participants.

MODELING OF CRISIS PHENOMENA IN REGIONAL STOCK MARKETS BY WAVELET-ENTROPY METHOD

The article reflects the results of a study on modelling regional stock markets using wavelet entropy. Particular attention is paid to periods of crises as special states of markets. Countries with the developed economies were selected for the study, namely, the United States, United Kingdom, Germany, France, China, Japan and Hong Kong. The values of stock indices of regional stock markets were used as a statistical base. The research period is from 2015 to 2021. The aim of the article is to monitor the current state of markets and to demonstrate the possibilities of using the wavelet entropy index as a precursor of crisis phenomena. The wavelet entropy method was used. All calculations were performed in the Matlab environment - a system for modeling nonlinear dynamical systems. The results of the study demonstrate the absence of crisis phenomena in these markets as of April 2021. It is shown that the use of wavelet entropy as a precursor indicator is reasonable. In particular, the reaction of stock markets to such crisis situations as the COVID-19 pandemic as well as other socio-political events is shown. Based on the results of calculations, conclusions are made about the current state of stock markets of the studied countries. All stock market participants, investors, and relevant ministries to develop effective strategies can use the results obtained, as well as the method in general.

The financial impact of COVID-19: Evidence from an event study of global hospitality firms

This paper examines the daily abnormal stock price returns of a sample of 154 publicly-traded hospitality firms from 23 different countries representing over $400 billion in combined market capitalization around the time that COVID-19 was first viewed by stock market participants as a major—possibly even existential—threat. The findings of the study suggest that, financially, hotels performed better than restaurants, which themselves performed better than casinos. These findings are consistent with medical recommendations concerning the relative safety of various hospitality-related activities and, therefore, also with the tenets of financial market efficiency in the hospitality sector. Additional findings suggest that hospitality firms with strong balance sheets and income statements characterized by relatively low leverage ratios, high market value (consistent with a “too big to fail” mentality), and higher price/earnings ratios (implying higher relative profitability) all fared better than smaller, weaker firms. Although, in no case, did Bloomberg's proprietary environmental, social, and governance (ESG) variable possess any predictive power, variables reflecting cross-country cultural differences support Huynh’s (2020) finding that “individualism” was an important factor in explaining the economic impact of the COVID-19 pandemic on hospitality firms.

Unexpected Housing Wealth Appreciation and Stock Market Participation

This study examines the causal effects of housing wealth appreciation on the stock market participation of households in China. Households that purchase a house with an area less than or equal to 90 m2 faced a significantly lower down payment following the unexpected announcements of a series of policies beginning in 2006, thus creating discontinuity in house size and a housing price jump around the cutoff point. Using the policy shock to implement a regression discontinuity design, we find the following: (1) Unexpected housing wealth appreciation substantially promotes households’ stock market participation. (2) The housing wealth effect relaxes households’ liquidity constraints and thus encourages them to invest in stocks. (3) The housing wealth effect is pronounced among younger individuals and employees of state-owned enterprises. Our findings support the positive housing wealth effect on stock market participation and provide clear policy implications for regulators.

Confidence in Financial Literacy, Stock Market Participation, and Retirement Planning

This study investigated whether overconfidence with respect to one’s financial literacy affects stock market participation and retirement preparation and if so, how. Using an effective sample of 12,653 Japanese individuals, the empirical results confirm that financial literacy plays a positive role, while confidence in financial literacy also matters. For people with relatively low financial literacy, overconfidence can encourage taking financial action, while for people with high financial literacy, underconfidence can deter action. Confidence could have an effect equal to or greater than financial literacy. Moreover, it was also found that the positive effect of overconfidence is weaker for women than for men.

Financial Inclusion, Livelihood Activities, and Stock Market Participation

This article examines the livelihood activities of households who are financially included and participate in the stock market. We sample 1,966 households in Ghana and employ two stage least squares and robust probit regression analysis to test the relationship of interest. We find the following results: First, financial inclusion significantly improves sustainable livelihood activities when individuals who own accounts, use their accounts to save, have access to credit, and use their account frequently through making withdrawals. Second, improvement in the livelihood (income) of individuals encourages stock market participation (SMP, using agent visits). Third, financial inclusion, in the form of using account for savings purposes, negatively influences SMP (investment is stocks) as individuals prefer holding liquid funds in savings account than investing in risky assets. Finally, the sensitivity of SMP to financial inclusion and livelihood (employment and income), suggests that as the livelihood of financial included persons improves, they are less inclined to participate in the stock market. We conclude that financial inclusion and livelihood activities are relevant in explaining the participation of Ghanaians on the stock market.

Inheritance and Stockholding: The Role of Expectations

Abstract This paper uses data from the Health and Retirement Study to investigate the role of inheritances for stockholding. Individual heir fixed-effects estimates show that an inheritance receipt increases subsequent stock market participation. The respective magnitude of this shift is higher for large and fully anticipated receipts, whereas it seems to be largest for fully but larger-than-expected transfers. Generally, our effects are driven by households entering the stock market. Also, a less pre-inheritance liquidity constrained household shows higher post-inheritance stock ownership probability. This suggests, inheritance size as well as receipt and size anticipation are determinants for stockholding. In the context of stock market participation, our results highlight considerable heir and transfer heterogeneity which can have important implications for bequest taxation and economic welfare. By means of the intergenerational transmission of inequality and socio-economic status via the ‘wealth channel’, households not only benefit from transfer receipt but also from later capital gains, due to stock market participation.

Financial Literacy and Low Stock Market Participation of Japanese Households

We investigated whether low financial literacy of Japanese households causes their low stock market participation. Based on our survey, we found that high financial literacy tends to increase stock market participation. We also found that households with higher financial literacy do not necessarily have a high shareholding ratio among financial assets.