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Abstract:
We analyze cross-sectional and time series information from forty-six equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices. We construct two measures of price efficiency that quantify the asymmetric response of individual stock returns to negative vs. positive information, and find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced. This evidence is consistent with more efficient price discovery at the individual security level. A common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic. We test this conjecture by examining the skewness of market returns. We find strong evidence that in markets where short selling is either prohibited or not practiced, market returns display significantly less negative skewness. However, at the individual stock level, short sales restrictions appear to make no difference.

Short Sales, Market Efficiency, Market Crashes

Abstract:
We analyze cross-sectional and time series information from forty-seven equity markets around the world, to consider whether short-sales restrictions affect the efficiency of the market, and the distributional characteristics of returns to individual stocks and market indices. Using the approach developed in Morck et.al. (2000) we find significantly more cross-sectional variation in equity returns in markets where short selling is feasible and practiced, controlling for a host of other factors. This evidence is consistent with more efficient price discovery at the individual security level. A common conjecture by regulators is that short-selling restrictions can reduce the relative severity of a market panic. We test this conjecture by examining the skewness of market returns. We find that in markets where short selling is either prohibited or not practiced, returns display significantly less negative skewness, and the frequency of extreme negative returns is lower. On the other hand, the overall volatility of individual returns and market returns is higher.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We analyze cross-sectional and time series information from forty-six equity markets around the world, to consider whether short sales restrictions affect the efficiency of the market, and the distributional characteristics of returns to individual stock and market indices. We construct two measures of price efficiency that quantify the asymmetric response of individual stock returns to negative vs. positive information, and find that prices incorporate information faster in countries where short sales are allowed and practiced. This evidence is consistent with more efficient price discovery at the individual security level. A common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic. We test this conjecture by examining the skewness of market returns. We find some evidence that in markets where short selling is either prohibited or not practices, market returns display significantly less negative skewness. However, at the individual stock level, short sales restrictions appear to make no difference.

Abstract:
We study the trading behavior of individual investors using the Trade and Quotes (TAQ) and Institute for the Study of Security Markets (ISSM) transaction data over the period 1983 to 2001. We document four results: (1) Order imbalance based on buyer- and sellerinitiated small trades from the TAQ/ISSM data correlates well with the order imbalance based on trades of individual investors from brokerage firm data. This indicates trade size is a reasonable proxy for the trading of individual investors. (2) Order imbalance based on TAQ/ISSM data indicates strong herding by individual investors. Individual investors predominantly buy (sell) the same stocks as each other contemporaneously. Furthermore, they predominantly buy (sell) the same stocks one week (month) as they did the previous week (month). (3) When measured over one year, the imbalance between purchases and sales of each stock by individual investors forecasts cross-sectional stock returns the subsequent year. Stocks heavily bought by individuals one year underperform stocks heavily sold by 4.4 percentage points in the following year. For stocks for which it is most difficult to arbitrage mispricings, the spread in returns between stocks bought and stocks sold is 13.1 percentage points the following year. (4) Over shorter periods such as a week or a month, a different pattern emerges. Stocks heavily bought by individual investors one week earn strong returns in the subsequent week, while stocks heavily sold one week earn poor returns in the subsequent week. This pattern persists for a total of three to four weeks and then reverses for the subsequent several weeks. In addition to examining the ability of small trades to forecast returns, we also look at the predictive value of large trades. In striking contrast to our small trade results, we find that stocks heavily purchased with large trades one week earn poor returns in the subsequent week, while stocks heavily sold one week earn strong returns in the subsequent week.

Behavioral Finance, Asset Pricing, Market Efficiency

Abstract:
In this paper we review evidence about the development of the Chinese capital markets over a crucial period in world market history, and place that development in the context of world financial markets at the time. Despite fundamental differences between China today and China 100 years ago, it is still important to consider the dangers of an imbalance between domestic and international investor markets, and the mismatch between domestic and foreign expectations about investor protection. The lessons of the last century suggest that China today should consider opening Chinese investor access to foreign capital markets in order to equilibrate the level of diversification between foreign and domestic investors. In addition, protection of domestic corporate investor rights is at least as important as protecting foreign investor rights.

This paper is available in Chinese at: http://papers.ssrn.com/abstract=289143

Abstract:
In this paper, we analyze the trading records of a major discount brokerage house to investigate the disposition effect, the tendency to sell winners too quickly than losers. In contrast to previous research that has demonstrated the disposition effect by aggregating across investors (Odean, 1998), our main objective is to identify individual differences in the disposition bias and explain this in terms of underlying investor characteristics. Building on the findings in experimental economics and self-correction in psychology, we hypothesize that investors' sophistication about financial markets and trading experience is responsible in part for the variation in individual disposition effect. Using demographic and socio-economic data as proxies for investors' sophistication, we find empirical evidence that wealthier and individual investors in professional occupations exhibit less disposition effect. Consistent with experimental economics, trading experience also tends to reduce the disposition effect. We provide guidelines for investment advisors, regulators and investment communities to utilize our findings and help investors make better decisions.

Disposition Effect, Investor Sophistication, Individual Decision Making

Abstract:
There is considerable empirical evidence that emotion influences decision-making. In this paper, we use a database of individual investor accounts to examine the weather effects on traders. Our analysis of the trading activity in five major US cities over a six-year period finds virtually no difference in individuals' propensity to buy or sell equities on cloudy days as opposed to sunny days. If the association between cloud cover and stock returns documented for New York and other world cities is indeed caused by investor mood swings, our findings suggest that researchers should focus on the attitudes of market-makers, news providers or other agents physically located in the city hosting the exchange. NYSE spreads widen on cloudy days. When we control for this, the weather effect becomes smaller and insignificant. We interpret this as evidence that the behaviour of market-makers, rather than individual investors, may be responsible for the relation between returns and weather.

Abstract:
Saunders (1993) and Hirshleifer and Shumway (2001) document the effect of weather on stock returns. The proposed explanation in both papers is that investor mood affects cognitive processes and trading decisions. In this paper, we use a database of individual investor accounts to examine the weather effects on traders. Our analysis of the trading activity in five major U.S. cities over a six-year period finds vistually no difference in individuals propensity to buy or sell equities on cloudy days as opposed to sunny days. If the association between cloud cover and stock returns documented for New York and other world cities is indeed caused by investor mood swings, our findings suggest that researchers should focus on the attitudes of market-makers, news providers or other agents physically located in the city hosting the exchange. NYSE spreads widen on cloudy days. When we control for this, the significance of the weather effect is dramatically reduced. We interpret this as evidence that the behavior of market-makers, rather than individual investors, may be responsible for the relation between returns and weather.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Saunders (1993) and Hirshleifer and Shumway (2001) document the effect of weather on stock returns. The proposed explanation in both papers is that investor mood affects cognitive processes and trading decisions. In this paper, we use a database of individual investor accounts to examine the weather effects on traders. Our analysis of the trading activity in five major U.S. cities over a six-year period finds virtually no difference in individuals' propensity to buy or sell equities on cloudy days as opposed to sunny days. If the association between cloud cover and stock returns documented for New York and other world cities is indeed caused by investor mood swings, our findings suggest that researchers should focus on the attitudes of market-makers, news providers or other agents physically located in the city hosting the exchange. NYSE spreads widen on cloudy days. When we control for this, the significance of the weather effect is dramatically reduced. We interpret this as evidence that the behavior of market-makers, rather that individual investors, may be responsible for the relation between returns and weather.

Weather Effect, Market Efficiency, Order Flow, Volatility, Individual Behavior

Abstract:
We examine the trades of individual and professional investors around stock splits and find that splits bring about a significant shift in investor clientele. We find that a higher fraction of post-split trades are made by less sophisticated investors, as individual investors increase and professional investors reduce their aggregate buying activity following stock splits. This behavior supports the common practitioners' belief that stock splits help attract new investors and improve stock liquidity. The shift in clientele also influences return properties, price discovery, and asset prices: stocks exhibit stronger serial correlation after splits; stocks co-move more with the market index; and the introduction of new investors explains part of the positive post-split drift puzzle.

Stock Splits, Clientele Change, Market Efficiency, Noise Trading, Investor Sophistication, Splits, Clientele Shift, Liquidity

Abstract:
This study investigates individual investors' bias towards nearby companies. Using data from a large U.S. discount brokerage, we find that individual investors tend to invest in companies closer to them relative to the market portfolio. Unlike Coval and Moskowitz's (1999) findings on institutional investors, however, we find that advantageous information cannot explain individual investors' local bias. Accounting numbers and information asymmetry matter less to individual investors' local bias than to that of institutional investors. Instead, we hypothesize that individuals' non-fundamentally based familiarity with local companies and ready reaction to local information are more plausible explanations. Consistent with this hypothesis, we find that individual investors are more likely to invest in remote companies that spend heavily on advertising. Evidence from investors' reactions to earnings announcements also confirms the hypothesis: local investors do not change their portfolios so as to take advantage of potentially advantageous information before earnings announcements. After earnings announcements, local investors change their portfolios more than remote investors in the direction opposite to the same earnings surprises.

Local Bias, Individual Behavior, Asset Pricing, Asymmetric Information, Overreaction, Familiarity

Abstract:
A substantial literature in institutional herding examines reasons for and evidence of correlated trading across institutional investors, but little has been written about the extent to which individual investor trading is correlated or why. We document that the trading of individuals is highly correlated and surprisingly persistent. Furthermore, we find that the systematic trading of individual investors is driven by their own decisions - trades they initiated - rather than by passive reactions to institutional herding. We discuss why this correlation is unlikely to stem from the same motivations as institutional herding. Correlated trading by individuals is a necessary condition for the trading biases of individual investors to affect asset prices, since the trades of any particular individual are likely to be small. The preferences for buying some stocks while selling others must be shared by many individual investors if these preferences are to affect prices. We analyze trading records for 66,465 households at a large national discount broker between January 1991 and November 1996 and 665,533 investors at a large retail broker between January 1997 and June 1999. Using a variety of empirical approaches, we document that the trading of individuals is more coordinated than one would expect by mere chance. For example, if individual investors are net buyers of a stock this month, they are likely to be net buyers of the stock next month.

Noise trading, herding, individual investors,

Abstract:
In this paper we review evidence about the development of the Chinese capital markets over a crucial period in world market history, and place that development in the context of world financial markets at the time. Despite fundamental differences between China today and China 100 years ago, it is still important to consider the dangers of an imbalance between domestic and international investor markets, and the mismatch between domestic and foreign expectations about investor protection. The lessons of the last century suggest that China today should consider opening Chinese investor access to foreign capital markets in order to equilibrate the level of diversification between foreign and domestic investors. In addition, protection of domestic corporate investor rights is at least as important as protecting foreign investor rights.

This paper is available in English at: http://papers.ssrn.com/abstract=289139

Abstract:
Short-selling differs significantly around the world, and practice depends not only on regulatory structure but upon costs and tax considerations. Our survey of world markets suggests that, while as much as 93 percent of the world's equity market by capitalization is shortable, there are particular regions of the world where it is difficult to take a short position. These include several countries in Southeast Asia and South America. When dual listings in markets allowing short-sales are considered, the capitalization that is potentially shortable increases to 96 percent. In this paper, we examine what factors in the global equity universe are not shortable and consider the implications for long-short strategies tied to global indices and futures instruments. We find important periods when an index of non-shortable securities is a major determinant of the global equity portfolio. We ask whether short-sales constraints are binding on global index arbitrage.

Abstract:
This paper investigates whether individual investors adjust their stock trading according to their stock selection abilities, which can be inferred from their trading history. Fixed-effect panel regressions provide strong evidence that the ability to forecast future stock returns significantly affects investors' trading activity: investors purchase more actively if they are more likely to have stock selection ability. Furthermore, trading experience - measured by the number of purchases, the number of different stocks purchased, and the variance of purchase dollar amounts - significantly helps improve investors' portfolio performance. In addition, we find that learning behavior varies across investors, which corroborates the heterogeneity of individual investors.

individual investors, learning, rationality, trading

Abstract:
This study reviews historical lessons, depicts present challenges, and discusses future perspectives of Chinese bond market. Historical lessons on sovereign right concession and market tumult lead to a quite cautious approach towards the bond market. The legal background, and political considerations also played an important role in shaping bond market during the past two decades. Given the increasing demand for financing in China these days, the bond market is expected to enjoy some rapid growth in the coming decade and we discuss some areas with particular potentials and the challenges facing the development.

China financial market, bond market, monetary policy, financial history

Abstract:
Our paper explores a comprehensive sample of small and large corporate bankruptcies in Arizona and New York from 1995-2001. We find that bankruptcy costs are very heterogeneous and sensitive to measurement method. Still, Chapter 7 liquidations appear no faster or cheaper (in terms of direct expense) than Chapter 11 bankruptcies. But Chapter 11 seems to preserve assets better, and thereby allows creditors to recover relatively more. Our paper also provides a large number of further empirical regularities.

Abstract:
This paper shows that the dynamics of Chapter 11 turn dramatically on the size of the business. The vast majority of the assets administered in Chapter 11 are concentrated in a handful of large cases, but most of the businesses in Chapter 11 are small, and the smaller the business, the smaller the distribution to general unsecured creditors. For businesses with assets above $5 million, unsecured creditors typically collect half of what they are owed. Where the business's assets are worth less than $200,000, ordinary general creditors usually recover nothing. In the typical small Chapter 11 case, the tax collector is the central figure. In small business bankruptcies, priority tax liabilities are the largest unsecured liabilities of the business. Tax obligations are entitled to priority and are obligations of both the corporation and those who run it. Given the large shadow tax claims cast over small Chapter 11 reorganizations, accounts of small Chapter 11 must focus squarely on them.

bankruptcy, creditors, Chapter 11

Abstract:
Our paper explores a comprehensive sample of both small and large corporate bankruptcies in Arizona and New York from 1995-2001. We find that bankruptcy costs are very heterogeneous and sensitive to measurement method. Still, Chapter 7 liquidations seem more expensive in direct and equally expensive in indirect costs, than Chapter 11 bankruptcies. The paper provides a large number of further empirical regularities.

Abstract:
This paper offers large sample evidence on bankruptcy costs for more than 800 Chapter 7 and Chapter 11 cases in two U.S. bankruptcy courts. For the comprehensive sample comprising mostly of small and private firms, bankruptcy costs account for about three percent of pre-filing book asset values for both chapters. The time that firms spend in bankruptcy procedure averages about 23 months, also similar between Chapter 7 and Chapter 11 cases. Contrary to previous belief, Chapter 7 procedure, which is essentially a cash auction system, is not particularly economical or timesaving than Chapter 11 procedure. Firms with greater pre-bankruptcy assets and more complicated financial structure tend to choose Chapter 11 and incur greater bankruptcy costs. Higher management equity holdings lead to greater bankruptcy costs but cannot explain why firms choose Chapter 11 instead of Chapter 7.

Bankruptcy Costs, Chapter 11, Chapter 7

Abstract:
We examine the role of sell-side financial analysts in generating commission revenues. Using a data set from 1997-2002 for America, Europe and Japan, we find that both the quality and quantity of equity research contribute to sell-side firm revenues. The perceived quality of investment bank equity research (the sell-side) drives market share in sales trading, but not in investment banking. By contrast, the volume of equity research, measured by number of analysts (or the number of companies covered or the number of reports published), is positively correlated with both trading and investment banking market share. This supports the hypothesis that equity research analysts are effective marketing and revenue-generating tools for sell-side firms.

Financial analyst, equity trading, financial intermediation

Abstract:
This paper finds that stock options issued to a company’s CEO influence the choice, amount, and timing of funds distributed as a buyback. Our results support two research expectations - that buybacks impose option-induced agency costs on outside shareholders, and that managers benefit from weak governance and opaque accounting rules in this choice. Once we control for these factors, we find no evidence that buyback activity associates reliably with the accretion in EPS from the reduction in common shares, a view advanced in prior work. Overall, we contend that the popular use of buybacks as a form of cash distribution derives significantly from a strong contemporaneous relation between share buybacks and executives’ use of stock options as compensation.

Stock buybacks, stock options, accounting rules, corporate governance, agency costs, management compensation, market reaction

Abstract:
This study examines the trading behavior of a large sample of individual (retail) investors around securities litigation events. We test the hypothesis that the response of these investors around the end of the litigation class period (at the time of a corrective disclosure) and the start of the class period (at the time of disclosure of allegedly false positive information) differs on the basis of the informedness of the investors. Our tests reject the hypothesis that more informed investors exhibit the same trading behavior as less informed investors. These results contribute to the literature by documenting differences in individual investor trading around events that reveal the start and end of an alleged financial fraud. These events can be relatively difficult to interpret and, so, it is not unreasonable that we should observe differences on the basis of informedness. We also examine individual investor trading within the class period and adduce that trading intensity is higher earlier in the class period, and higher overall relative to a control period. These findings are inconsistent with the often-applied proportional trading model for the calculation of class action damages, which assumes all shares trade with equal probability.

Individual investor behavior, accounting fraud, securities litigation damages, class period trading, investor informedness

Abstract:
This paper utilizes the population of personal bankruptcy filings in the state of Delaware during 2003 and finds that household expenditures on durable consumption goods, such as houses and automobiles, contribute significantly to personal bankruptcy. Medical conditions also lead to personal bankruptcy filings, but other adverse events such as divorce and unemployment have marginal effect. Over-consumption makes households financially over-stretched and more susceptible to adverse events, which reconcile the strategic filing and adverse event explanations.

personal bankruptcy, consumption, bankruptcy law reform

Abstract:
We use calendar-time portfolios and transaction-level data to test if individual investors have any value-relevant information. Individual investors are poor at picking stocks. Stocks bought over the past twelve months under-perform stocks sold by 2.18% per annum (1.38% on a risk adjusted basis). We divide each individual's portfolio into local and remote stocks. Portfolios of local stocks do not significantly outperform portfolios of remote stocks. At times, local portfolios actually under-perform remote portfolios. Our results are robust to one-, three-, and five-year holding periods; equal- and value-weighted portfolio formation methods; and the consideration of non S&P 500 stocks. There is simply no evidence that individuals have information about the local stocks in their portfolios. Our results differ from previous studies of individual investor geography because we correctly account for the fact that stock returns are contemporaneously correlated.

Home Bias, Informed Trading, Familiarity

Abstract:
We document empirical support for the 'house money' effect proposed by Thaler and Johnson (1990). Market makers for Taiwan' TAIEX index options tend to take above-average risks in afternoon trading after above-average morning gains. The fraction of market makers with better-than-average morning performance influences market-level liquidity and volatility in the afternoon trading. Our findings confirm that prior outcome influences subsequent risk-taking and emphasize that how investors frame previous outcomes influences their subsequent attitude toward risks.

House money effect, market maker, derivatives, investor behavior

Abstract:
China is representative of many emerging markets in that its bankruptcy law and enforcement is weak and institutional background remains under-developed. Taking advantage of the country`s regional variations in government quality and financial development, we are interested in understanding what mechanisms influence distressed firm behavior in emerging markets.

We find that institutional background matters considerably. Distressed firms facing relatively weak institutional background (i.e. state-owned firms, firms from areas with poorer government quality and/or more backward financial development) display poorer operating performance, more aggressive capital structure and investment policy, and ultimately lower recovery likelihood. The results are robust for both state-owned firms and private firms, and hold in a host of robustness tests.

Our findings provide novel evidence on how augmenting institutional factors discipline distressed firm behavior in an emerging market environment where bankruptcy law enforcement and creditor monitoring are weak.

Distress, Bankruptcy, China, Law and Economics, Corporate Governance

Abstract:
We investigate how institutional factors influence behavior of distressed firms in emerging markets, where bankruptcy laws are often weak and debtors have greater bargaining power in distress. By studying a comprehensive sample of distressed firms in China, a representative of the cases in other emerging markets, we find that institutional background matters considerably to distress resolution. Distressed companies facing better institutional background (i.e. with less state ownership structure, in regions with better government quality and greater degree of local financial development), display relatively better operating performance, more disciplined capital structure, and higher ultimate recovery likelihood. Our findings provide novel evidence on how institutional factors discipline distressed firm behavior and facilitate distress resolution in emerging markets.

Institution; Distress; Bankruptcy; Emerging Market

Abstract:
We employ a statistical criterion (out-of-sample hit rate) and a financial market measure (portfolio performance) to compare the forecasting accuracy of three model selection approaches: Bayesian information criterion (BIC), model averaging, and model mixing. While the more recent approaches of model averaging and model mixing surpass the Bayesian information criterion in their out-of-sample hit rates, the predicted portfolios from these new approaches do not significantly outperform the portfolio obtained via the BIC subset selection method.

model selection, BIC, model averaging, model mixing, stock predictability, financial markets

Abstract:
Using data on all employees at listed companies in Taiwan, where pension plans were rare, we find that bias toward employer stocks is generic to individual investor decisionmaking, but not limited to retirement plans. 71 percent of sample employees invest in employer stocks and the employer stocks make up on average 47 percent of employee equity portfolios. The under-diversification resulting from the bias toward employer stocks is highly costly. Holding current portfolio risk constant, employees forego 4.89 percent per annum in raw returns by investing in employer stocks, which represents 39.74 percent of their average 1998 salary income. Our findings have important implications for social security reform and retirement account management.

Employer stock, retirement, pension reform, investor behavior

Abstract:
In this article we review the development of Chinese capital markets over a crucial period in the history of markets worldwide, and place that development in context. Despite fundamental differences between China today and China 100 years ago, it is still important to consider the effects of an imbalance between domestic and international investor markets, and the mismatch between domestic and foreign expectations about investor protection. The lessons of the last century suggest that China today should consider opening Chinese investor access to foreign capital markets in order to equilibrate the level of diversification between foreign and domestic investors. In addition, our analysis suggests that protecting of domestic corporate investor rights is at least as important as protecting foreign investor rights.

Abstract:
This paper examines how filing for bankruptcy under Chapter 13 helps financially distressed debtors save their homes. We develop a model of debtorsâ¬" decisions to default on their mortgages and file for bankruptcy under Chapter 13 and evaluate the model using new data on Chapter 13 bankruptcy filers. We also examine the effect of allowing bankruptcy judges to reduce debtorsâ¬" mortgage payments, i.e., introducing â¬Scram-downâ¬? of mortgages in Chapter 13.

We find that 96% of Chapter 13 filers are homeowners and 79% of filers repay mortgage debt in their repayment plans; while just 9% of filers repay only unsecured debt in their plans. These results suggest that filers use Chapter 13 almost exclusively as a â¬Ssave-your-homeâ¬? procedure. But under current law, only about 1% Chapter 13 filers save their homes when they would otherwise have defaulted. If cram-down were introduced, we predict that this fraction would increase to 10%. The cost to lenders of introducing cram-down is estimated to be $264,000 per home saved and $30 billion in total.

Institutional subscribers to the NBER working paper series, and resident of developing countries may download this paper without additional charge at www.nber.org

Abstract:
We study the trading of individual investors using transaction data and identifying buyer- or seller-initiated trades. We document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers. (2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts future returns; stocks heavily bought underperform stocks heavily sold by 4.4 percentage points the following year. (4) Over a weekly horizon, small trade order imbalance reliably predicts returns, but in the opposite direction; stocks heavily bought one week earn strong returns the subsequent week, while stocks heavily sold earn poor returns.

G11, G12, G14

Abstract:
After analyzing retail investors' stock trades for potential learning behavior, we present evidence that individual investors learn from their trading experience. Initially, we question whether investors' previous forecasting ability (inferred from prior purchases' subsequent risk-adjusted performance) affects their future trade profitability and activity. Indeed, as an investor's inferred ability increases, so does her ensuing trade profitability and intensity. Further, because additional investment experience allows more accurate ability inference, we posit that trading experience should help investors obtain better investment performance. Consistent with this hypothesis, not only do excess portfolio returns improve with account tenure, but we also find that trade quality (i.e., average raw and excess buy-minus-sell returns) significantly increases with experience (i.e., calendar time and account tenure). In sum, individual stock investors do learn, and they consequently adjust their behavior and thus effectively improve their investment performance.

Learning, rationality, self-attribution, over-confidence, individual investors

Abstract:
This study investigates households' decision between direct equity investment and indirect investment through mutual funds. We present evidence that the tendency to invest through delegated portfolio management (i.e. mutual funds) versus direct investing is significantly influenced by households' cost of time. Households with greater professional engagement, personal responsibilities, and less leisure time, proxies for higher cost of time, invest more in mutual funds relative to direct investment. The results are robust when controlling household risk-aversion and investment abilities. The findings underscore how search costs influence household financial decision-making and the growth of mutual fund industry.

mutual fund, search cost, cost of time, investor choice