Information Sharing and Stock Market Participation: Evidence from Extended Families
20 Pages Posted: 15 Apr 2009 Last revised: 27 Jul 2009
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Information Sharing and Stock Market Participation: Evidence from Extended Families
Information Sharing and Stock Market Participation: Evidence from Extended Families
Date Written: July 25, 2009
Abstract
Using the Panel Study of Income Dynamics, we document that, controlling for observable characteristics, household investors' likelihood of entering stock markets within the ensuing five years is 30 percent higher if their parents or children had entered stock markets within the previous five years. We interpret the findings as evidence that information sharing among parents and children plays an important role facilitating household financial decisions. We can largely rule out outstanding competitive hypothesis for four reasons. First, members of the same extended family are bound by exogenous biological ties, instead of endogenous matching. Second, even family members live far away from each other tend to communicate frequently, even as interactions among people living close geographically decline due to the rise of alternative social channels. Third, by studying the sequential patterns of stock ownership changes, we explicitly address the fact that information sharing and dissemination take time and rule out the potential nature and nurture effects. Finally, because we did not find the same sequential patterns in stock market exits, our results do not support the hypothesis of herding behavior.
Keywords: Information sharing, Stock market participation, Extended families
JEL Classification: D14, D83, G21
Suggested Citation: Suggested Citation
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