Do Bankruptcy Protection Levels Affect Households' Demand for Stocks?
60 Pages Posted: 18 Mar 2015 Last revised: 27 Oct 2020
Date Written: August 2, 2020
To gain understanding on the role of institutional factors on households' demand for risky financial assets, this paper examines empirically the impact of the level of personal bankruptcy provisions in the US. Chapter 7 allows protecting the home equity in bankruptcy up to a certain limit or “exemption” that varies across states and over time. Previous literature shows that such exemption biases investment towards home equity. Here I test whether it also lowers investment in unprotected assets, particularly stocks. Using an instrumental variable approach and household survey data, I estimate a lower stock market participation when the household's home equity is below the exemption level. However, I do not find a stronger response from households at higher risk of bankruptcy. Moreover, I do not confirm the evidence of a higher investment in home equity when the home is fully protected. These findings have implications for policy design: They suggest no substantial portfolio distortions from the level of home equity that is protected in bankruptcy.
Keywords: Personal bankruptcy law, Home equity protection, Stock market participation, Portfolio allocation
JEL Classification: D14, G00, G11, K35
Suggested Citation: Suggested Citation