Participation Constraints in the Stock Market: Evidence from Unexpected Inheritance Due to Sudden Death

32 Pages Posted: 20 Mar 2009

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March, 18 2009

Abstract

This paper exploits a natural experiment to investigate the impact of participation constraints on households' decision to invest in the stock market. Exogenous variation in financial wealth results from unexpected inheritance due to sudden deaths, and allows us to examine the causal impact of fixed entry and participation costs on stock market participation. We find that unexpected inherited wealth has a strong positive effect on participation. Moreover, households which inherit stocks rather than cash are significantly more likely to hold stocks in the future supporting investment inertia. Although, these results provide evidence of the existence of fixed entry costs, a substantial fraction of households still do not respond to sizeable windfalls. This suggests that many households are constrained by psychological factors such as gambling aversion or insufficient knowledge about their investment opportunities.

Keywords: Stock Market Participation, Household Finance, Portfolio Choice, Sudden Death, Inheritance

JEL Classification: E2, D8, G1

Suggested Citation

Andersen, Steffen and Nielsen, Kasper Meisner, Participation Constraints in the Stock Market: Evidence from Unexpected Inheritance Due to Sudden Death (March, 18 2009). Available at SSRN: https://ssrn.com/abstract=1363859 or http://dx.doi.org/10.2139/ssrn.1363859

Steffen Andersen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Kasper Meisner Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

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