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Political Uncertainty and Household Stock Market Participation

Published online by Cambridge University Press:  04 March 2022

Vikas Agarwal Open the ORCID record for Vikas Agarwal [Opens in a new window] ,
Hadiye Aslan Open the ORCID record for Hadiye Aslan [Opens in a new window] ,
Lixin Huang  and
Honglin Ren
Vikas Agarwal
Affiliation:
Georgia State University Robinson College of Business vagarwal@gsu.edu
Hadiye Aslan
Affiliation:
Georgia State University Robinson College of Business haslan@gsu.edu
Lixin Huang
Affiliation:
Georgia State University Robinson College of Business lxhuang@gsu.edu
Honglin Ren*
Affiliation:
Renmin University of China School of Business
*
renhonglin@rmbs.ruc.edu.cn (corresponding author)
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Abstract

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Using microlevel panel data and a difference-in-differences identification strategy, we study the effect of political uncertainty on household stock market participation. We find that households significantly reduce their participation and reallocate funds to safer assets during periods of increased political uncertainty prior to gubernatorial elections. The decline in participation is related to households’ response to elevated asset risk and their incentive to hedge increased labor income risk. In situations where uncertainty remains high after elections, pre-election reduction in participation is only partially reversed.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 8 , December 2022 , pp. 2899 - 2928
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We appreciate helpful comments from Sreedhar Bharath, Amit Bubna, Chuck Buker, Sudheer Chava, Philippe d’Astous, Grant Farnsworth, Rohan Ganduri, John Graham, Huseyin Gulen, Jarrad Harford (the editor), Brandon Julio, Stephen A. Karolyi, Eric Kelley, Christian Lundblad, Steffen Meyer, Renuka Sane, Stephan Siegel, Ajay Subramanian, Yulia Veld-Merkoulova, Tracy Yue Wang (the referee), Baozhong Yang, Vincent Yao, Haibei Zhao, seminar and conference participants at the 2019 AFA Annual Meetings, the 2019 EFA Annual Meetings, the 2018 Emerging Markets Finance Conference, the 2018 CEAR-RSI Household Finance Workshop, the 2018 Conference on Financial Economics and Accounting, the 2018 FMA Annual Meetings, the 2018 FSU SunTrust Beach Conference, the 2018 Boulder Summer Conference on Consumer Financial Decision Making, the 2019 Academic Research Colloquium for Financial Planning and Related Disciplines, China Europe International Business School, Clemson University, Georgia State University, Hanqing Advanced Institute of Economics and Finance at Renmin University of China, Ivey Business School, Lehigh University, Paris Dauphine University, Renmin University of China, Texas Christian University, and help from Julia Beckhusen, Shelley K. Irving, Karen Kosanovich, Peter Mateyka, and Kyle Vezina of the U.S. Census Bureau. We thank Brad M. Barber and Terrance Odean for sharing their brokerage data with us. Xuxi Guo and Yen-Lin Huang provided excellent research assistance. Vikas Agarwal acknowledges the support from the Centre for Financial Research in Cologne. We thank the organizers of the 2019 Academic Research Colloquium for Financial Planning and Related Disciplines for the best paper prize in household finance.

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