The Effect of Investment Literacy on the Likelihood of Retail Investor Margin Trading and Having a Margin Call

15 Pages Posted: 18 May 2021

See all articles by Hohyun Kim

Hohyun Kim

Department of Business Administration

Kyoung Tae Kim

University of Alabama

Sherman D. Hanna

Ohio State University (OSU)

Date Written: May 16, 2021

Abstract

Using a sample of 1,215 US retail investors, we provide evidence on the effect of investment literacy and of investment literacy overconfidence on the likelihood of purchasing securities on margin, and also, among those who had purchased securities on margin, the likelihood of experiencing a margin call. Based on multivariate analyses, the likelihood of buying on margin decreased with investment literacy, and also increased with overconfidence. The likelihood of buying on margin decreased with age, and increased with risk tolerance and with the amount of investment assets. Among those who had bought securities on margin, the likelihood of experiencing a margin call decreased with investment literacy, without control variables, and increased with risk tolerance. However, with control variables, no variable had a significant relationship with having a margin call. This study provides important insights for researchers as well as practitioners on the relationship between margin trading and market quality.

Keywords: Margin trading, margin call, investment literacy, overconfidence, risk tolerance

JEL Classification: D14, D81, D91, G11, G41

Suggested Citation

Kim, Hohyun and Kim, Kyoung Tae and Hanna, Sherman D., The Effect of Investment Literacy on the Likelihood of Retail Investor Margin Trading and Having a Margin Call (May 16, 2021). Finance Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3847408

Hohyun Kim

Department of Business Administration ( email )

358 Chiljeon-dong
Chuncheon, Gangwon-do
Korea, Republic of (South Korea)

Kyoung Tae Kim (Contact Author)

University of Alabama ( email )

316-C Adams Hall
Tuscaloosa, AL 35487-0001
United States

Sherman D. Hanna

Ohio State University (OSU) ( email )

1787 Neil Avenue
Campbell 265D
Columbus, OH 43210
United States
614-292-4584 (Phone)

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