Information Sharing and Stock Market Participation: Evidence from Extended Families

Abstract: Using the Panel Study of Income Dynamics, we document that, controlling for observable characteristics, household investors' likelihood of entering the stock market within the next five years is about 30 percent higher if their parents or children had entered the stock market during the previous five years. Because even family members who live far away from each other tend to communicate frequently, despite the fact that interactions among people living close geographically have declined with the rise of alternative social channels, we argue that these findings highlight the significance of information sharing regarding household financial decisions. In addition, focusing on the sequential patterns of stock market entry, we explicitly take into account the time needed for information to be shared and disseminated among family members. Our finding that one member's entry positively influences future entries of other family members at distinct stages of the life cycle allows us to largely rule out the hypothesis that the observed correlations in stock market entries are primarily caused by common preferences shared by family members. Furthermore, because we do not find similar sequential patterns in stock market exits, our results do not support the hypothesis of herding behavior.