Political Involvement, Information Costs, and Stock Market Participation

52 Pages Posted: 19 Mar 2011

See all articles by Alok Kumar

Alok Kumar

University of Miami - Miami Herbert Business School

Yosef Bonaparte

University of Colorado at Denver - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2011

Abstract

This paper examines whether politically active individuals are more likely to participate in the stock market. Our key conjecture is that politically involved individuals follow political news more actively, which increases their chances of being exposed to financial news. Consequently, their information gathering costs decline and the propensity to participate in the market increases. We find support for our hypothesis using micro-level and state-level data from the U.S. as well as cross-country data from Europe. Specifically, we find that politically involved individuals spend about 30 minutes more on news and appear more knowledgeable about the economy and the markets. Further, irrespective of their political affiliation, politically involved individuals in the U.S. are 9% more likely to participate in the stock market. Using a state’s battleground status as an instrument, we demonstrate that greater political involvement causes higher participation rates.

Keywords: Investment decisions, stock market participation, political involvement, information costs, individual investors

JEL Classification: G10, G11, G12

Suggested Citation

Kumar, Alok and Bonaparte, Yosef, Political Involvement, Information Costs, and Stock Market Participation (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786725 or http://dx.doi.org/10.2139/ssrn.1786725

Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

517B Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://sites.google.com/view/alokmiami/home

Yosef Bonaparte

University of Colorado at Denver - Department of Finance ( email )

United States

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