Trust, Sociability and Stock Market Participation

Abstract

This paper examines the influence of both trust and sociability on stock market participation and their implications for international differences in stockholding. Using data from the Survey of Health, Ageing and Retirement in Europe supplemented with information on regional trust from the World Value Survey, we assess the extent to which prevailing trust in the region of residence and household involvement in social activities affect stockholding behavior across ten European countries. We show that trust and sociability have distinct and sizeable effects on stock market participation. We find that more sociable households and those living in areas with higher trust are more likely to invest in stocks. Probing further into various groups of households, we find that sociability can induce stockholding among the less well off in Sweden, Denmark and Switzerland where stock market participation is widespread. On the other hand, the effect of trust is strong in countries with limited participation and low average trust like Austria, Spain and Italy, offering an explanation for the remarkably low participation rates of the wealthy living therein.

Keywords: Trust, sociability, household finance, stockholding

JEL Classification: A13, D12, D8, G11