Participation Constraints in the Stock Market: Evidence from the Unexpected Inheritance Due to Sudden Death

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We use a natural experiment to investigate the impact of participation constraints on individuals' decisions to invest in the stock market. Unexpected inheritance due to sudden deaths results in exogenous variation in financial wealth, and allows us to examine whether fixed entry and ongoing participation costs cause non-participation. We have three key findings. First, windfall wealth has a positive effect on participation. Second, the majority of households do not react to sizeable windfalls by entering the stock market, but hold on to substantial safe assets—even over longer horizons. Third, the majority of households inheriting stock holdings actively sell the entire portfolio. Overall, these findings suggest that participation by many individuals is unlikely to be constrained by financial participation costs.
We use a natural experiment to investigate the impact of participation constraints on individuals' decisions to invest in the stock market. Unexpected inheritance due to sudden deaths results in exogenous variation in financial wealth, and allows us to examine whether fixed entry and ongoing participation costs cause non-participation. We have three key findings. First, windfall wealth has a positive effect on participation. Second, the majority of households do not react to sizeable windfalls by entering the stock market, but hold on to substantial safe assets—even over longer horizons. Third, the majority of households inheriting stock holdings actively sell the entire portfolio. Overall, these findings suggest that participation by many individuals is unlikely to be constrained by financial participation costs.
LanguageEnglish
JournalReview of Financial Studies
Volume24
Issue number5
Pages1667-1697
ISSN0893-9454
DOIs
StatePublished - May 2011

Cite this

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title = "Participation Constraints in the Stock Market: Evidence from the Unexpected Inheritance Due to Sudden Death",
abstract = "We use a natural experiment to investigate the impact of participation constraints on individuals' decisions to invest in the stock market. Unexpected inheritance due to sudden deaths results in exogenous variation in financial wealth, and allows us to examine whether fixed entry and ongoing participation costs cause non-participation. We have three key findings. First, windfall wealth has a positive effect on participation. Second, the majority of households do not react to sizeable windfalls by entering the stock market, but hold on to substantial safe assets—even over longer horizons. Third, the majority of households inheriting stock holdings actively sell the entire portfolio. Overall, these findings suggest that participation by many individuals is unlikely to be constrained by financial participation costs.",
author = "Steffen Andersen and {Meisner Nielsen}, Kasper",
year = "2011",
month = "5",
doi = "10.1093/rfs/hhq146",
language = "English",
volume = "24",
pages = "1667--1697",
journal = "Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",
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}

Participation Constraints in the Stock Market : Evidence from the Unexpected Inheritance Due to Sudden Death. / Andersen, Steffen; Meisner Nielsen, Kasper.

In: Review of Financial Studies, Vol. 24, No. 5, 05.2011, p. 1667-1697.

Research output: Contribution to journalJournal articleResearchpeer-review

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N2 - We use a natural experiment to investigate the impact of participation constraints on individuals' decisions to invest in the stock market. Unexpected inheritance due to sudden deaths results in exogenous variation in financial wealth, and allows us to examine whether fixed entry and ongoing participation costs cause non-participation. We have three key findings. First, windfall wealth has a positive effect on participation. Second, the majority of households do not react to sizeable windfalls by entering the stock market, but hold on to substantial safe assets—even over longer horizons. Third, the majority of households inheriting stock holdings actively sell the entire portfolio. Overall, these findings suggest that participation by many individuals is unlikely to be constrained by financial participation costs.

AB - We use a natural experiment to investigate the impact of participation constraints on individuals' decisions to invest in the stock market. Unexpected inheritance due to sudden deaths results in exogenous variation in financial wealth, and allows us to examine whether fixed entry and ongoing participation costs cause non-participation. We have three key findings. First, windfall wealth has a positive effect on participation. Second, the majority of households do not react to sizeable windfalls by entering the stock market, but hold on to substantial safe assets—even over longer horizons. Third, the majority of households inheriting stock holdings actively sell the entire portfolio. Overall, these findings suggest that participation by many individuals is unlikely to be constrained by financial participation costs.

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DO - 10.1093/rfs/hhq146

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