Windfall gains and stock market participation

Joseph Briggs; David Cesarini; Erik Lindqvist; Robert Östling

doi:10.1016/j.jfineco.2020.07.014

Windfall gains and stock market participation

Joseph Briggs, David Cesarini, Erik Lindqvist, Robert Östling

Research output: Contribution to journal › Article › peer-review

Abstract

We exploit the randomized assignment of lottery prizes in a large administrative Swedish data set to estimate the causal effect of wealth on stock market participation. A $150,000 windfall gain increases the stock market participation probability by 12 percentage points among prelottery nonparticipants but has no discernible effect on prelottery stock owners. A structural life cycle model significantly overpredicts entry rates even for very high entry costs (up to $31,000). Additional analyses implicate pessimistic beliefs regarding equity returns as a major source of this overprediction and suggest that both recent and early-life return realizations affect beliefs.

Original language	English (US)
Journal	Journal of Financial Economics
DOIs	https://doi.org/10.1016/j.jfineco.2020.07.014
State	Accepted/In press - 2020

Keywords

Household saving and personal finance
Intertemporal consumer choice
Portfolio choice and investment decisions

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

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title = "Windfall gains and stock market participation",

abstract = "We exploit the randomized assignment of lottery prizes in a large administrative Swedish data set to estimate the causal effect of wealth on stock market participation. A $150,000 windfall gain increases the stock market participation probability by 12 percentage points among prelottery nonparticipants but has no discernible effect on prelottery stock owners. A structural life cycle model significantly overpredicts entry rates even for very high entry costs (up to $31,000). Additional analyses implicate pessimistic beliefs regarding equity returns as a major source of this overprediction and suggest that both recent and early-life return realizations affect beliefs.",

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AU - Briggs, Joseph

AU - Cesarini, David

AU - Lindqvist, Erik

AU - Östling, Robert

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AB - We exploit the randomized assignment of lottery prizes in a large administrative Swedish data set to estimate the causal effect of wealth on stock market participation. A $150,000 windfall gain increases the stock market participation probability by 12 percentage points among prelottery nonparticipants but has no discernible effect on prelottery stock owners. A structural life cycle model significantly overpredicts entry rates even for very high entry costs (up to $31,000). Additional analyses implicate pessimistic beliefs regarding equity returns as a major source of this overprediction and suggest that both recent and early-life return realizations affect beliefs.

KW - Household saving and personal finance

KW - Intertemporal consumer choice

KW - Portfolio choice and investment decisions

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