Political Corruption, Trust, and Household Stock Market Participation

59 Pages Posted: 22 Apr 2019 Last revised: 16 Feb 2022

See all articles by Di Bu

Di Bu

Macquarie University, Department of Applied Finance

Tobin Hanspal

WU Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Yin Liao

Australian National University - The Centre for Applied Macroeconomic Analysis (CAMA); Macquarie University - Department of Applied Finance and Actuarial Studies

Date Written: March 28, 2019

Abstract

We study how political corruption affects stock market participation among households in China. Our identification strategy exploits recent anticorruption campaigns that reduce households' exposure to political corruption and within-province variation in lifetime exposure to local corruption. We find that households with higher corruption exposure participate less in the stock market at both the extensive and intensive margins. Removals of top provincial officials during the anticorruption campaign increase the probability of stock market participation by 3 percentage points and households' net equity purchases and equity share percentage by 13.2 and 0.2 percentage points, respectively. The effect is predominantly driven by the nonpecuniary effect of corruption on households' trust and perceptions of institutional quality rather than on households' accumulation of wealth. Our work highlights the negative externalities of political corruption on financial markets.

Keywords: Political Corruption, Stock Market Participation, Anticorruption Campaign, Formative experiences, Trust

JEL Classification: D03, D14, G11, G02, D81, D73

Suggested Citation

Bu, Di and Hanspal, Tobin and Liao, Yin and Liao, Yin, Political Corruption, Trust, and Household Stock Market Participation (March 28, 2019). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3361970 or http://dx.doi.org/10.2139/ssrn.3361970

Di Bu

Macquarie University, Department of Applied Finance ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Tobin Hanspal (Contact Author)

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1 1
Wien, 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Yin Liao

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
United States

Australian National University - The Centre for Applied Macroeconomic Analysis (CAMA) ( email )

Canberra, Australian Capital Territory 2601
Australia

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