Information sharing and stock market participation: Evidence from extended families
| Authors | Li |
| Journal | Review of Economics and Statistics |
| Year | 2014 |
| Type | Published Paper |
| Abstract | Using the Panel Study of Income Dynamics, we document that controlling for observable characteristics, household investors' likelihood of entering the stock market within the ensuing five years is about 20% to 30% higher if their parents or children had entered the stock market during the previous five years. By eliminating competing hypotheses such as preference similarity and herding, we argue that these findings highlight the significance of information sharing regarding household financial decisions. |
| URL | https://doi.org/10.1162/REST_a_00301 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
The diffusion of microfinance
| Authors | Banerjee, Chandrasekhar, Duflo, Jackson |
| Year | 2013 |
| Type | Working Paper |
| Abstract | We examine how participation in a microfinance program diffuses through social networks. We collected detailed demographic and social network data in 43 villages in South India before microfinance was introduced in those villages and then tracked eventual participation. We exploit exogenous variation in the importance (in a network sense) of the people who were first informed about the program, "the injection points". Microfinance participation is higher when the injection points have higher eigenvector centrality. We estimate structural models of diffusion that allow us to (i) determine the relative roles of basic information transmission versus other forms of peer influence, and (ii) distinguish information passing by participants and non-participants. We find that participants are significantly more likely to pass information on to friends and acquaintances than informed non-participants, but that information passing by non-participants is still substantial and significant, accounting for roughly a third of informedness and participation. We also find that, conditioned on being informed, an individual's decision is not significantly affected by the participation of her acquaintances. |
| Keywords | Social network centralities, information transmission, microfinance program |
| URL | https://www.nber.org/papers/w17743 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
The determinants of attitudes toward strategic default on mortgages
| Authors | Guiso, Sapienza, Zingales |
| Journal | Journal of Finance |
| Year | 2013 |
| Type | Published Paper |
| Abstract | We use survey data to measure households' propensity to default on mortgages even if they can afford to pay them (strategic default) when the value of the mortgage exceeds the value of the house. The willingness to default increases in both the absolute and the relative size of the home-equity shortfall. Our evidence suggests that this willingness is affected by both pecuniary and non-pecuniary factors, such as views about fairness and morality. We also find that exposure to other people who strategically defaulted increases the propensity to default strategically because it conveys information about the probability of being sued. |
| URL | https://doi.org/10.1111/jofi.12044 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Peer effects and loan repayment: Evidence from the Krishna default crisis
| Authors | Breza |
| Year | 2012 |
| Type | Working Paper |
| Abstract | Around the world, microfinance ties borrowers together using group repayment meetings, shared oaths and often, joint liability. Microfinance institutions (MFIs) have invested heavily in building social capital and generally boast stellar repayment rates. However, recent repayment crises have fueled speculation that peer effects might also reinforce default behavior. I estimate the causal effect of peer repayment on individuals' repayment decisions in the absence of joint liability following a district-level default in which 100% of borrowers temporarily defaulted on their loans and after which borrowers gradually decided whether to repay. Because the defaults occurred simultaneously, the timing of the shock induced variation in repayment incentives both at the individual and peer group levels. Individuals (or peer groups) near the end of their 50-week loan cycles were closest to receiving new loans and had the strongest incentives to repay; those who had recently received disbursements had the weakest. Using the variation in the peer group's incentives to instrument for peer repayment, I find that if a borrower's peers shift from full default to full repayment, she is 10-15pp more likely to repay. Last, I present a dynamic discrete choice model of the repayment decision to estimate the net benefit of the peer mechanism to the MFI. Repayers' positive influence on others (not non-repayers' negative influence) mainly drives the effect. Thus, peer effects actually improve repayment rates relative to a counterfactual without peer effects. |
| URL | https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/6030/Draft_2013_april_v2.pdf |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Peer performance and stock market entry
| Authors | Kaustia, Knupfer |
| Journal | Journal of Financial Economics |
| Year | 2012 |
| Type | Published Paper |
| Abstract | Peer performance can influence the adoption of financial innovations and investment styles. We present evidence of this type of social influence: recent stock returns that local peers experience affect an individual's stock market entry decision, particularly in areas with better opportunities for social learning. The likelihood of entry does not decrease as returns fall below zero, consistent with people not talking about decisions that have produced inferior outcomes. Market returns, media coverage, local stocks, omitted local variables, short sales constraints, and stock purchases within households do not seem to explain these results. |
| Keywords | Investor behavior, peer effect, social interaction, social influence, stock market participation |
| URL | https://doi.org/10.1016/j.jfineco.2011.01.010 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Social Transmission Biases |
Do internet stock message boards influence trading? Evidence from heavily discussed stocks with no fundamental news
| Authors | Sabherwal, Sarkar, Zhang |
| Journal | Journal of Business Finance & Accounting |
| Year | 2012 |
| Type | Published Paper |
| Abstract | This study extends the literature on the information content of stock message boards. To better understand the effect of online postings on trading activities and reduce the error due to stocks with small message board followings, we examine stocks with no fundamental news and high message posting activity. Such stocks tend to be of small firms with weak financials. For those stocks, we find a two-day pump followed by a two-day dump manipulation pattern among online traders, which suggests that an online stock message board can be used as a herding device to temporarily drive up stock prices. We also find that online traders' credit-weighted sentiment index, but not the number of postings, is positively associated with contemporaneous return and negatively predicts the return next day and two days later. Also, absolute sentiment is negatively related with contemporaneous and next day's intraday volatility and positively related with the proportion of volume in small-sized trades. We conclude that message board sentiment is an important predictor of trading-related activities. |
| Keywords | Internet stock message board, online trading, investor sentiment, noise trader, naive bayesian, text classifier |
| URL | https://onlinelibrary.wiley.com/doi/full/10.1111/j.1468-5957.2011.02258.x |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis |
The effects of traditional and social earned media on sales: A study of a microlending marketplace
| Authors | Stephan, Galak |
| Journal | Journal of Marketing Research |
| Year | 2012 |
| Type | Published Paper |
| Abstract | Marketers distinguish three types of media: paid (e.g., advertising), owned (e.g., company website), and earned (e.g., publicity). The effects of paid media on sales have been extensively covered in the marketing literature. The effects of earned media, however, have received limited attention. The authors examine how two types of earned media, traditional (e.g., publicity and press mentions) and social (e.g., blog and online community posts), affect sales and activity in each other. They analyze 14 months of daily sales and media activity data from a microlending marketplace website using a multivariate autoregressive time-series model. They find that (1) both traditional and social earned media affect sales; (2) the per-event sales impact of traditional earned media activity is larger than for social earned media; (3) because of the greater frequency of social earned media activity, after adjusting for event frequency, social earned media's sales elasticity is significantly greater than traditional earned media's; and (4) social earned media appears to play an important role in driving traditional earned media activity. |
| Keywords | Social media, short selling, intraday trading, retail investors |
| URL | https://www.jstor.org/stable/41714453 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Media and Textual Analysis |
Religious beliefs, gambling attitudes, and financial market outcomes
| Authors | Kumar, Page, Spalt |
| Journal | Journal of Financial Economics |
| Year | 2011 |
| Type | Published Paper |
| Abstract | This study investigates whether geographic variation in religion-induced gambling norms affects aggregate market outcomes. We conjecture that gambling propensity would be stronger in regions with higher concentrations of Catholics relative to Protestants. Consistent with our conjecture, we show that in regions with higher Catholic-Protestant ratios, investors exhibit a stronger propensity to hold lottery-type stocks, broad-based employee stock option plans are more popular, the initial day return following an initial public offering is higher, and the magnitude of the negative lottery-stock premium is larger. Collectively, these results indicate that religion-induced gambling attitudes impact investors' portfolio choices, corporate decisions, and stock returns. |
| Keywords | Gambling, religion, institutional investors, employee stock option plans, IPOs |
| URL | https://doi.org/10.1016/j.jfineco.2011.07.001 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Manager / Firm Behavior |
Nature or nurture: What determines investor behavior?
| Authors | Barnea, Cronqvist, Siegel |
| Journal | Journal of Financial Economics |
| Year | 2010 |
| Type | Published Paper |
| Abstract | Using data on identical and fraternal twins' complete financial portfolios, we decompose the cross-sectional variation in investor behavior. We find that a genetic factor explains about one-third of the variance in stock market participation and asset allocation. Family environment has an effect on the behavior of young individuals, but this effect is not long-lasting and disappears as an individual gains experience. Frequent contact among twins results in similar investment behavior beyond a genetic factor. Twins who grew up in different environments still display similar investment behavior. Our interpretation of a genetic component of the decision to invest in the stock market is that there are innate differences in factors affecting effective stock market participation costs. We attribute the genetic component of asset allocation-the relative amount invested in equities and the portfolio volatility-to genetic variation in risk preferences. |
| Keywords | Portfolio choice, investor heterogeneity, behavioral genetics |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X10001777 |
| Tags | Archival Empirical | Evolutionary Finance | Financing- and Investment Decisions (Individual) | Social Network Structure |
Individualism and momentum around the world
| Authors | Chui, Titman, Wei |
| Journal | Journal of Finance |
| Year | 2010 |
| Type | Published Paper |
| Abstract | This paper examines how cultural differences influence the returns of momentum strategies. Cross-country cultural differences are measured with an individualism index developed by Hofstede (2001), which is related to overconfidence and self-attribution bias. We find that individualism is positively associated with trading volume and volatility, as well as to the magnitude of momentum profits. Momentum profits are also positively related to analyst forecast dispersion, transaction costs, and the familiarity of the market to foreigners, and negatively related to firm size and volatility. However, the addition of these and other variables does not dampen the relation between individualism and momentum profits. |
| Keywords | Cultural differences, momentum strategy, asset pricing, behavioral finance |
| URL | https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2009.01532.x |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
Individualism and momentum around the world
| Authors | Chui, Titman, Wei |
| Journal | Journal of Finance |
| Year | 2010 |
| Type | Published Paper |
| Abstract | This paper examines how cultural differences influence the returns of momentum strategies. Crossâcountry cultural differences are measured with an individualism index developed by Hofstede (2001), which is related to overconfidence and selfâattribution bias. We find that individualism is positively associated with trading volume and volatility, as well as to the magnitude of momentum profits. Momentum profits are also positively related to analyst forecast dispersion, transaction costs, and the familiarity of the market to foreigners, and negatively related to firm size and volatility. However, the addition of these and other variables does not dampen the relation between individualism and momentum profits. |
| Keywords | cultural differences, momentum strategy, stock return, behavioral finance |
| URL | https://doi.org/10.1111/j.1540-6261.2009.01532.x |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) |
Peer effects in the trading decisions of individual investors
| Authors | Ng, Wu |
| Journal | Financial Management |
| Year | 2010 |
| Type | Published Paper |
| Abstract | This study examines for evidence of peer effects in the trading decisions of individual investors from Mainland China, a country whose cultural and social structures are vastly different from those of Western countries. Cultural differences, as widely documented, play a significant role in social interactions and word-of-mouth behavior. In contrast to US studies, we find robust evidence that the trading decisions of Chinese investors are influenced, via word of mouth, by those of their peers who maintain brokerage accounts at the same branch, but not by those whose accounts are maintained at another branch located in the same city. |
| URL | https://doi.org/10.1111/j.1755-053X.2010.01093.x |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
An epidemic model of investor behavior
| Authors | Shive |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2010 |
| Type | Published Paper |
| Abstract | I test whether social influence affects individual investors' trading and stock returns. In each of the 20 most active stocks in Finland over 9 years, the number of owners in a municipality multiplied by the number of investors who do not own a stock, a measure of the rate of transmission of diseases and rumors through social contact, predicts individual investor trading. I control for known determinants of trade, including daily news, and show that competing explanations for the relation are unlikely. Socially motivated trades predict stock returns, and the effects are not reversed, suggesting that individuals share useful information. Individuals' susceptibility to social influence has declined during the period, but the opportunities for social influence have increased. |
| URL | https://doi.org/10.1017/S0022109009990470 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Mutual fund attributes and investor behavior
| Authors | Bollen |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2009 |
| Type | Published Paper |
| Abstract | I study the dynamics of investor cash flows in socially responsible mutual funds. Consistent with anecdotal evidence of loyalty, the monthly volatility of investor cash flows is lower in socially responsible funds than in conventional funds. I find strong evidence that cash flows into socially responsible funds are more sensitive to lagged positive returns than cash flows into conventional funds, and weaker evidence that cash outflows from socially responsible funds are less sensitive to lagged negative returns. These results indicate that investors derive utility from the socially responsible attribute, especially when returns are positive. |
| Keywords | Mutual fund, social responsibility, cash flow, investor behavior, investor utility |
| URL | https://doi.org/10.1017/S0022109000004142 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
Neighbors matter: Causal community effects and stock market participation
| Authors | Brown, Ivkovic, Smith, Weisbenner |
| Journal | Journal of Finance |
| Year | 2008 |
| Type | Published Paper |
| Abstract | This paper establishes a causal relation between an individual's decision whether to own stocks and average stock market participation of the individual's community. We instrument for the average ownership of an individual's community with lagged average ownership of the states in which one's nonnative neighbors were born. Combining this instrumental variables approach with controls for individual and community fixed effects, a broad set of time-varying individual and community controls, and state-year effects rules out alternative explanations. To further establish that word-of-mouth communication drives this causal effect, we show that the results are stronger in more sociable communities. |
| URL | https://doi.org/10.1111/j.1540-6261.2008.01364.x |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Trusting the stock market
| Authors | Guiso, Sapienza, Zingales |
| Journal | Journal of Finance |
| Year | 2008 |
| Type | Published Paper |
| Abstract | We study the effect that a general lack of trust can have on stock market participation. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function of the objective characteristics of the stocks and the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. In Dutch and Italian micro data, as well as in cross-country data, we find evidence consistent with lack of trust being an important factor in explaining the limited participation puzzle. |
| Keywords | Social trust, investment decisions, cultural and demographic differences, risk and ambiguity aversion |
| URL | https://doi.org/10.1111/j.1540-6261.2008.01408.x |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Theory |
Information diffusion effects in individual investors' common stock purchases: Covet thy neighbors' investment choices
| Authors | Ivkovic, Weisbenner |
| Journal | Review of Financial Studies |
| Year | 2007 |
| Type | Published Paper |
| Abstract | We study the relation between households' stock purchases and stock purchases made by their neighbors. A ten percentage point increase in neighbors' purchases of stocks from an industry is associated with a two percentage point increase in households' own purchases of stocks from that industry. The effect is considerably larger for local stocks and among households in more social states. Controlling for area sociability, households' and neighbors' investment style preferences, and the industry composition of local firms, we attribute approximately one-quarter to one-half of the correlation between households' stock purchases and stock purchases made by their neighbors to word-of-mouth communication. |
| URL | https://doi.org/10.1093/revfin/hhm009 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Does culture affect economic outcomes?
| Authors | Guiso, Sapienza, Zingales |
| Journal | Journal of Economic Perspectives |
| Year | 2006 |
| Type | Published Paper | Literature Review Paper |
| Abstract | Until recently, economists have been reluctant to rely on culture as a possible determinant of economic phenomena. Much of this reluctance stems from the very notion of culture: it is so broad and the channels through which it can enter the economic discourse so ubiquitous (and vague) that it is difficult to design testable, refutable hypotheses. In recent years, however, better techniques and more data have made it possible to identify systematic differences in people's preferences and beliefs and to relate them to various measures of cultural legacy. These developments suggest an approach to introducing culturally-based explanations into economics that can be tested and may substantially enrich our understanding of economic phenomena. This paper summarizes this approach and its achievements so far, and outlines directions for future research. |
| Keywords | Cultural economics, preferences and beliefs redistribution, economic sociology |
| URL | https://www.aeaweb.org/articles?id=10.1257/jep.20.2.23 |
| Tags | Evolutionary Finance | Financing- and Investment Decisions (Individual) |
Correlated trading and location
| Authors | Feng, Seasholes |
| Journal | Journal of Finance |
| Year | 2005 |
| Type | Published Paper |
| Abstract | This paper analyzes the trading behavior of stock market investors. Purchases and sales are highly correlated when we divide investors geographically. Investors who live near a firm's headquarters react in a similar manner to releases of public information. We are able to make this identification by exploiting a unique feature of individual brokerage accounts in the People's Republic of China. The data allow us to pinpoint an investor's location at the time he or she places a trade. Our results are consistent with a simple, rational expectations model of heterogeneously informed investors. |
| URL | https://doi.org/10.1111/j.1540-6261.2004.00694.x |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Social interaction and stock-market participation
| Authors | Hong, Kubik, Stein |
| Journal | Journal of Finance |
| Year | 2005 |
| Type | Published Paper |
| Abstract | We propose that stock-market participation is influenced by social interaction. In our model, any given "social" investor finds the market more attractive when more of his peers participate. We test this theory using data from the Health and Retirement Study, and find that social households-those who interact with their neighbors, or attend church-are substantially more likely to invest in the market than non-social households, controlling for wealth, race, education, and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher. |
| URL | https://doi.org/10.1111/j.1540-6261.2004.00629.x |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |