Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel

Forthcoming Review of Financial Studies

48 Pages Posted: 28 Feb 2017 Last revised: 7 Oct 2018

See all articles by Gianpaolo Parise

Gianpaolo Parise

EDHEC

Kim Peijnenburg

Netspar; Centre for Economic Policy Research (CEPR); EDHEC Business School - Department of Economics & Finance

Multiple version iconThere are 3 versions of this paper

Date Written: September 26, 2018

Abstract

This paper provides evidence for how noncognitive abilities affect financial distress. In a representative panel of households, we find that people in the bottom quintile of noncognitive abilities are ten times more likely to experience financial distress than those in the top quintile. We provide evidence that this relation arises largely from worse financial choices and lack of financial insight by low-ability individuals, and only to a lesser degree reflects differential exposure to income shocks. We mitigate endogeneity concerns using an IV approach and an extensive set of controls. Implications for policy and finance research are discussed.

Keywords: Noncognitive abilities, financial distress, financial choices, behavioral finance, psychology and economics

JEL Classification: D10; D14; G41

Suggested Citation

Parise, Gianpaolo and Peijnenburg, Kim, Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel (September 26, 2018). Forthcoming Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2924527 or http://dx.doi.org/10.2139/ssrn.2924527

Gianpaolo Parise

EDHEC ( email )

393 Promenade des Anglais
Nice, 06200
France

Kim Peijnenburg (Contact Author)

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

EDHEC Business School - Department of Economics & Finance ( email )

France

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