How Does the Level of Bankruptcy Protection Affect Households' Demand for Stocks?
57 Pages Posted: 18 Mar 2015 Last revised: 18 Sep 2019
Date Written: September 17, 2019
This paper examines empirically how the level of personal bankruptcy provisions in the US affect stock market participation. Chapter 7 allows to protect the home equity in bankruptcy up to a certain level (“exemption”) that varies across states and over time. By biasing investment towards home equity, this protection could reduce the demand for unprotected assets, particularly stocks. I estimate a lower participation among households below the exemption that can still obtain additional protection by investing in home equity. However, when exploiting increases in exemptions to address the endogeneity of wealth, I do not find that they significantly reduce participation. This also holds for households at higher risk of bankruptcy. These findings imply that intensive-margin increases in the home equity protection do not have unintended negative effects on the demand for risky financial assets. Moreover, I show theoretically that introducing some bankruptcy protection at the extensive margin could encourage financial risk-taking relative to households without a consumption floor.
Keywords: Personal Bankruptcy Law, Home Equity Protection, Background Risk, Stock Market Participation
JEL Classification: D14, G00, G11, K35
Suggested Citation: Suggested Citation