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Trusting the Stock MarketLuigi GuisoEinaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR) Paola SapienzaNorthwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) Luigi ZingalesUniversity of Chicago Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of Chicago - Polsky Center for Entrepreneurship; European Corporate Governance Institute (ECGI) October 2005 NBER Working Paper No. w11648 Abstract: We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross country data.
Number of Pages in PDF File: 60 working papers seriesDate posted: December 1, 2005Suggested CitationContact Information
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