Summary:
Financial development can promote the efficient allocation of capital and long-term economic growth. Although per capita income and wealth have increased significantly in China in recent years, 2015 data suggest that most Chinese families do not participate in financial markets. This is called the limited participation phenomenon. Most families neither directly hold stocks nor invest in indirect equity holding instruments such as mutual funds, it is true for families of various wealth levels and this phenomenon exists in many countries.The limited participation phenomenon has many adverse effects on the welfare of households and the long-term growth of the economy. If families do not participate in the financial market at all, they cannot raise their welfare level by holding financial assets, and they have no opportunity to diversify their asset portfolios and smooth their life-long consumption. This study uses the 2015 Chinese General Social Survey dataset to explore the impact of private and public information on family financial market participation. The logit and probit models commonly used to analyze this problem are susceptible to endogeneity. Therefore, this study uses the propensity score matching method based on a causal inference analysis framework to control the problem of endogeneity. It analyzes and compares the real effects of private information and public information on family financial market participation. The analysis has two important findings. First, most households in China neither hold financial assets nor have access to private information about financial markets. Access to private information and sufficient public information can significantly increase the probability of family financial market participation. The more channels a household uses to obtain public information and the more public information a household obtains through various channels, the higher the family's probability of participating in the financial market. Second, the effect of public information is generally greater than that of private information on family financial market participation, due to differences in individuals' expectations about the quality of the two types of information. Public information can be obtained through more sources and has greater verifiability than private information, which increases households' belief in the quality of public information. Therefore, public information provides greater incentives to participate in financial markets. However, when a family obtains only a limited amount of public information, the influence of public information in promoting financial market participation does not exceed that of private information. In 2015, most families in China did not participate in financial markets, which means that many Chinese households did not hold financial assets such as stocks, bonds, funds, etc. This study's findings suggest that this choice is partly influenced by whether a family has private information and the amount of public information it has access to. Currently, most families have no private information and only a limited amount of public information. Therefore, as public information cannot fully exert its ability to stimulate financial market participation and the influence of private information is weak, which lead to the limited participation in financial market of Chinese households. For China and other developing countries, financial deepening is crucial to achieve higher levels of economic growth in the future. Increasing the amount of public information obtained by households may help to encourage families to participate in financial markets. The amount of public information depends to some extent on the quality of the formal institutions that guarantee the quality of public information. According to the World Bank's Worldwide Governance Indicators, the percentile rank of China's governance effectiveness in 2018 was 69.71, the United States and Japan were 92.31 and 94.23, and Russia and Brazil were 50.96 and 36.06, respectively. This shows that developing countries such as China have room for improvement in this area. The quality of formal institutions can be significantly improved by enhancing the efficiency of the policy formulation and implementation and the credibility of policy commitments. To promote the development of financial markets and long-term economic growth, developing countries can gradually improve the public's subjective expectations of the quality of public information through these measures, which would encourage families to participate in financial markets. This is especially important for developing countries with relatively backward financial development.
Allen, F., and D. Gale. 1994. “Limited Market Participation and Volatility of Asset Prices”,American Economic Review, 84(4):933～955.
[7]
Brealey, R., H. E. Leland, and D. H. Pyle. 1977. “Informational Asymmetries, Financial Structure, and Financial Intermediation”,Journal of Finance, 32(2):371～387.
[8]
Brown, J. R., Z. Ivkovic', P. A. Smith, et al. 2008. “Neighbors Matter: Causal Community Effects and Stock Market Participation”,Journal of Finance, 63(3):1509～1531.
[9]
Cole, S. A., and G. K. Shastry. 2009. “Smart Money: The Effect of Education, Cognitive Ability, and Financial Literacy on Financial Market Participation”, Harvard Business School Boston, MA.
[10]
Ellsberg, D. 1961. “Risk, Ambiguity, and the Savage Axioms”,Quarterly Journal of Economics, 75(4):643～669.
[11]
Epstein, L. G., and M. Schneider. 2008. “Ambiguity, Information Quality, and Asset Pricing”,Journal of Finance, 63(1):197～228.
[12]
Finnerty, J. E. 1976. “Insiders and Market Efficiency”,Journal of Finance, 31(4):1141～1148.
[13]
Georgarakos, D., and G. Pasini. 2011. “Trust, Sociability, and Stock Market Participation”,Review of Finance, 15(4):693～725.
[14]
Grinblatt, M., M. Keloharju, and J. Linnainmaa. 2011. “IQ and Stock Market Participation”,Journal of Finance, 66(6):2121～2164.
[15]
Grossman, S. 1976. “On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information”,Journal of Finance, 31(2):573～585.
[16]
Guiso, L., M. Haliassos, and T. Jappelli. 2003. “Household Stockholding in Europe: Where Do We Stand and Where Do We Go？”,Economic Policy, 18(36):123～170.
[17]
Guiso, L., P. Sapienza, and L. Zingales. 2008. “Trusting the Stock Market”,Journal of Finance, 63(6):2557～2600.
[18]
Guiso, L., and P. Sodini. 2013, “Household Finance: An Emerging Field”,Handbook of the Economics of Finance. Elsevier. 1397～1532.
[19]
Ho, T. S., and R. Michaely. 1988. “Information Quality and Market Efficiency”,Journal of Financial and Quantitative Analysis, 23(1):53～70.
[20]
Hong, H., J. D. Kubik, and J. C. Stein. 2004. “Social Interaction and Stock‐Market Participation”,Journal of Finance, 59(1):137～163.
[21]
Jagolinzer, A. D., D. F. Larcker, G. Ormazabal, et al. 2017. “Political Connections and the Informativeness of Insider Trades”,Rock Center for Corporate Governance at Stanford University Working Paper 222.
[22]
Kahneman, D., and A. Tversky. 1979.“Prospect Theory: An Analysis of Decision under Risk” ,Econometrica, 47(2): 263～291.
[23]
Karadas, S. 2018. “Family Ties and Informed Trading: Evidence from Capitol Hill”,Journal of Economics and Finance, 42(2):211～248.
[24]
Li, G. 2014. “Information Sharing and Stock Market Participation: Evidence from Extended Families”,Review of Economics and Statistics, 96(1):151～160.
[25]
Mankiw, N. G., and S. P. Zeldes. 1991.“The Consumption of Stockholders and Non-Stockholders” ,Journal of Financial Economics, 29 (1) :97～112.
[26]
Merton, R. C. 1987. “A Simple Model of Capital Market Equilibrium with Incomplete Information”,Journal of Finance, 42(3):483～510.
[27]
Osili, U. O., and A. L. Paulson. 2008. “Institutions and Financial Development: Evidence from International Migrants in the United States”,The Review of Economics and Statistics, 90(3):498～517.
[28]
Seyhun, H. N. 1986. “Insiders' Profits, Costs of Trading, and Market Efficiency”,Journal of Financial Economics, 16(2):189～212.
[29]
Stiglitz, J. E. 2002. “Information and the Change in the Paradigm in Economics”,American Economic Review, 92(3):460～501.
[30]
Van Rooij, M., A. Lusardi, and R. Alessie. 2011. “Financial Literacy and Stock Market Participation”,Journal of Financial Economics, 101(2):449～472.
[31]
Vissing-Jorgensen, A. 2002. “Limited Asset Market Participation and the Elasticity of Intertemporal Substitution”,Journal of Political Economy, 110(4):825～853.
[32]
Vissing-Jorgensen, A. 2003. “Perspectives on Behavioral Finance: Does“Irrationality” Disappear with Wealth？ Evidence from Expectations and Actions”,NBER Macroeconomics Annual, 18:139～194.
[33]
Yoong, J. 2011. “Financial Illiteracy and Stock Market Participation: Evidence from the Rand American Life Panel”,Financial Literacy: Implications for Retirement Security and the Financial Marketplace, 76.
