How Does the Level of Bankruptcy Protection Affect Households' Demand for Stocks?

57 Pages Posted: 18 Mar 2015 Last revised: 18 Sep 2019

See all articles by Mariela Dal Borgo

Mariela Dal Borgo

Bank of Mexico, Financial Stability Directorate

Date Written: September 17, 2019

Abstract

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

Dal Borgo, Mariela, How Does the Level of Bankruptcy Protection Affect Households' Demand for Stocks? (September 17, 2019). 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

Register to save articles to
your library

Register

Paper statistics

Downloads
124
Abstract Views
1,094
rank
231,412
PlumX Metrics