Do Bankruptcy Protection Levels Affect Households' Demand for Stocks?

64 Pages Posted: 18 Mar 2015 Last revised: 9 Apr 2021

See all articles by Mariela Dal Borgo

Mariela Dal Borgo

Bank of Mexico, Financial Stability Directorate

Date Written: January 25, 2021

Abstract

This paper examines empirically the effect of the level of personal bankruptcy protection in the US on households' demand for financial assets. A Chapter 7 bankruptcy allows protecting the home equity up to a certain limit or "exemption". Previous literature shows that such exemption biases investment towards home equity. This paper tests whether it also lowers investment in stocks, which are not protected in bankruptcy. Using an instrumental variable approach, I estimate a lower stock market participation when the home equity is below the exemption, but the result is not robust, and households at higher risk of bankruptcy do not exhibit a stronger response. Moreover, investment in home equity is not higher when the home is fully protected. These findings 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

Dal Borgo, Mariela, Do Bankruptcy Protection Levels Affect Households' Demand for Stocks? (January 25, 2021). 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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