Does Bankruptcy Protection Affect Risk-Taking in Household Portfolios?

76 Pages Posted: 18 Mar 2015 Last revised: 7 Feb 2017

Mariela Dal Borgo

Bank of Mexico, Financial Stability Directorate

Date Written: February 6, 2017

Abstract

This paper examines empirically the causal effect of personal bankruptcy provisions on stock market participation. Exploiting the time variation in home equity protection, I do not find evidence that such protection encourages participation, not even from the self-employed or from sick households, more exposed to background risks. I find a negative effect on stock ownership driven by the 2005 spike in filing rates. As households rush to file before the bankruptcy reform, those with more home equity and highly indebted lose stocks at intermediate protection levels. These findings uncover an unintended, anticipatory effect of the bankruptcy reform on financial outcomes.

Keywords: Personal Bankruptcy Law, Home Equity Protection, Background Risk, Stock Market Participation

JEL Classification: D14, G00, G11, K35

Suggested Citation

Dal Borgo, Mariela, Does Bankruptcy Protection Affect Risk-Taking in Household Portfolios? (February 6, 2017). Available at SSRN: https://ssrn.com/abstract=2579411 or http://dx.doi.org/10.2139/ssrn.2579411

Mariela Dal Borgo (Contact Author)

Bank of Mexico, Financial Stability Directorate ( email )

Av. 5 de Mayo 2
Mexico City, 06059
Mexico

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