Why Do Wealthy Investors have a Higher Return on their Stocks?
46 Pages Posted: 22 Mar 2021
Date Written: March 21, 2021
An analysis of the Survey of Consumer Finance shows that wealthy investors have a higher return on their stocks than their poorer counterparts. Three key empirical facts emerge: (i) wealthy investors employ more productive search efforts, (ii) financial risk bearing and search efforts are complementary, and (iii) wealthy investors have a higher risk adjusted return. These facts present a challenge to the “standard” asset pricing theory, which assumes that the return on stocks is uncorrelated with wealth and omits any relationship between search activity and portfolio returns. This study presents a search theoretic model of portfolio choice to understand the relationship between wealth, return, and search behavior.
Keywords: Investment decisions, financial behavior, search and risk behavior, Econometrics, and Sample selection.
JEL Classification: D01, D11, D12, D81, D83, G10, G11, G12
Suggested Citation: Suggested Citation