Suitability Check and Household Investments in Structured Products

52 Pages Posted: 2 Mar 2012 Last revised: 28 Aug 2016

Eric C. Chang

University of Hong Kong - School of Business

Dragon Yongjun Tang

The University of Hong Kong - School of Economics and Finance

Miao Ben Zhang

University of Southern California - Marshall School of Business

Date Written: July 11, 2013

Abstract

The suitability of complex financial products for household investors is an important issue in light of consumer financial protection. The U.S. Dodd-Frank Act, for instance, mandates that distributors check suitability when selling structured products to retail investors. However, little empirical evidence exists on such transactions. Using data from Hong Kong, we find that investors purchase 8% more structured products, on average, when the suitability is not checked. The effect of suitability checks is more pronounced for less financially literate investors. Moreover, investors tend to buy products with lower risk-adjusted returns when product suitability is not checked.

Keywords: structured products, suitability check, household investments

JEL Classification: G18

Suggested Citation

Chang, Eric C. and Tang, Dragon Yongjun and Zhang, Miao Ben, Suitability Check and Household Investments in Structured Products (July 11, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2013230 or http://dx.doi.org/10.2139/ssrn.2013230

Eric Chieh C. Chang

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Dragon Yongjun Tang (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

KKL 1005
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

Miao Ben Zhang

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH-231
Los Angeles, CA 90089
United States

HOME PAGE: http://www.MiaoBenZhang.com/

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