| Abstract | Limited stock market participation is today often a key issue in household finances. Although standard theory has predicted universal participation, in empirical investigations many households fail to earn equity premiums. Existing literature turns to fixed participation costs, nonstandard preferences, beliefs, and a lack of trust to explain this issue. However, even these attributes can explain only a part of the wide dispersion in participation rate.
This study examines an important but unappreciated determinant of stock market participation–early-life experience. A large literature in finance has shown that personal life experiences account for people’s risk-taking behavior, both in the laboratory and in the field. Yet, early-life experience’s long run effect on stock market participation behavior later in the life has been thus far ignored.
In this paper, we focus on early-life experience impact on stock market participation. China provides an ideal research setting due to its huge rural-urban disparity for two reasons. First, being long-time exposed to rural environment at a young age is a randomly designated characteristic due to strict migration restriction that existed for several decades. Whether to be exposed to rural areas is born, which cannot be easily switched. Second, unlike in most of the developed countries, there exist huge socioeconomic differences in both the immediate setting and the social systems between rural areas and urban areas. In this dual system, living in rural areas means totally different ecology to children compared to living in urban areas. This salient disparity makes it a credible identification of childhood exposure. In this sense, this paper examines whether rural experience at young ages affects the stock market participation of urban residents using individual-level data in China. Using CFPS data, we identify rural experience by Hukou Registration Type in childhood.
Rural-urban setting in China has a number of advantages for studying the connection between early-life experience and stock market participation. First, being long-time exposed to rural environment at a young age is a randomly designated characteristic due to strict migration restriction that existed for several decades. Whether to be exposed to rural areas is born, which cannot be easily switched. Second, unlike in most of the developed countries, there exist huge socioeconomic differences in both the immediate setting and the social systems between rural areas and urban areas. This salient disparity makes it a credible identification of childhood experience. Third, concerns on selection bias can be almost addressed in this setting. Since rural residents are much less educated than urban residents with rural experience during childhood.
In our empirical test, we find that rural experience deters stock market participation. The economic magnitude of the rural experience effect is quite large. Specifically, individuals with rural experience are around 4.3% less likely to participate in the stock markets, which is equivalent to a 35% decrease in the unconditional probability of participation (12.2%). In support of this interpretation, individuals with rural experience or not have similar wealth and social interaction, which help to cover the fixed participation cost. The finding holds true even after we control for personal differences in trust, social interaction, risk attitude, financial literacy, early-life socioeconomic status, and a large set of households’ demographic and economic characteristics. Providing further evidence, the effect of childhood exposure does not fade away with wealth. This implies that early-life experience has a chance to explain why even the rich may stay away from the stock market, even if they can afford the fixed participation cost.
Building on these findings, we further investigate what can mitigate the adverse effect of rural experience on stock market participation. According to literature on personality traits, we hypothesize that the influence of openness may affect rural experience’s effect on stock market participation. In our results, we find that a higher level of openness significantly mitigates the rural experience effect. In fact, we find that rural childhood exposure does not have an impact on stock market participation among people with higher levels of openness. These findings are consistent with psychological theory predictions.
|