Social Interaction and Stock Market
Participation:
Evidence from British Panel Data
Sarah Brown and Karl Taylor
Department of Economics
University of Sheffield
July 2011
Introduction and Background
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Relationship between social interaction &
participation in the stock market at the
individual level.
Growing interest in the role of social capital
& social interaction in the economy.
Social interaction & social capital might
influence financial & economic decisionmaking at the individual or household level;
Investment in risky financial assets & social
interaction: Hong et al. (2004).
Dept of Economics, University of Sheffield, UK
Introduction and Background
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Word-of-mouth or observational
learning relating to opportunities or
how to invest;
Satisfaction from talking about
stocks & shares with fellow
investors – ‘hobby’;
Social norms of the group –
‘keeping up with the Jones’.
Dept of Economics, University of Sheffield, UK
Introduction and Background
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Ivkovic & Weisbenner (2007): positive
relationship between a household’s stock
purchases & those made by neighbours.
Brown et al. (2008): a causal link between an
individual’s decision to own stocks & the
average stock market participation of the
individual’s community;
Hong et al. (2004): a positive association
between social interaction & stock market
participation in the U.S.;
Christelis et al. (2010): socially active
households are more likely to own shares.
Dept of Economics, University of Sheffield, UK
Introduction and Background
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We explore the relationship between social
interaction & the propensity to invest in risky
financial assets for the UK;
We employ a relatively wide range of measures of
social interaction as well as a measure of
generalised trust.
Our main contribution lies in exploiting the panel
nature of our data;
We analyse the probability of stock market
participation over time via a fixed effects
framework;
We also analyse the dynamics of stock market
participation over time to investigate the role of
state dependence.
Dept of Economics, University of Sheffield, UK
Data
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British National Child Development Study
(NCDS).
Cohort study: target sample of all children
born in Great Britain during a given week –
March 3rd to March 9th – in 1958;
The NCDS was conducted at ages 7, 11,
16, 23, 33, 42, 46 and 50 (2008/09).
Age 50, 35% of the sample own stocks/and
or shares in 2008.
Dept of Economics, University of Sheffield, UK
Measurement of Social
Interaction
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1.
2.
The NCDS includes four measures of social
interaction in 2008;
Three binary indicators for whether the
individual is a member of one club, two or
three clubs, or four or more clubs;
Binary dummy variable equal to unity if
the individual currently attends church two
or three times a month or more
frequently;
Dept of Economics, University of Sheffield, UK
Measurement of Social
Interaction (continued)
3.Binary indicator equal to unity if the
individual has visited their friends three or
more times in the last two weeks;
4. Binary indicator equal to unity if the
individual is currently an active member of
a sports club and attends once a month or
more frequently;
Plus: a binary dummy variable equal to unity
if the individual believes that most people
can be trusted
Dept of Economics, University of Sheffield, UK
Measurement of Social
Interaction (continued)
% of sample investing in stocks and/or
shares in 2008/09
Social
Non Social
Clubs
41%
27%
Friends
38%
34%
Church
44%
35%
Sport
47%
33%
Trust
39%
31%
Observations
7,286
Dept of Economics, University of Sheffield, UK
Social interaction & the probability of
stock market participation in 2008/09
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Cross-section analysis;
Logit model;
Stock market participation and social
interaction are measured
concurrently, i.e. in 2008.
STOCKit 2008  1 if STOCK *ti  2008  X i '    SOCit  2008   i
STOCKit 2008  0 otherwise
Dept of Economics, University of Sheffield, UK
Dependent variable= stock market
participation in 2008/09; marginal effects
Clubs
Member of
1 club
0.032
(2.12)
Member of
2-3 clubs
0.092
(5.51)
Member of
> 3 clubs
0.122
(3.64)
Attends
church
Visits
friends
Member of
sports club
Most can
be trusted
Church
Friends
Sport
Trust
0.024
(2.18)
0.042
(3.20)
0.074
(4.60)
0.011
(0.93)
Social Interaction and Stock Market
Participation: Panel Data Analysis, Fixed Effects
Analysis
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Information on stock and/or share
ownership was also available in 1991 (age
33) & 1981 (age 23).
%s participating in the stock market in
1981, 1991 and 2008 are 4%, 22% %
35%, respectively.
Consistent binary measures of social
interaction over time relating to the
number of clubs that the individual is a
member of, church attendance, and
participation in sport.
Dept of Economics, University of Sheffield, UK
Social Interaction and Stock Market
Participation: Panel Data Analysis, Fixed Effects
Analysis
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Binary fixed effects logit model;
Unbalanced panel, 11,673
observations.
STOCKit  1 if
STOCKit*  X it '   SOCit  i   it
STOCKit  0 otherwise
Dept of Economics, University of Sheffield, UK
Social Interaction and Stock Market
Participation: Panel Data Analysis, Fixed Effects
Analysis (Continued)
Clubs
Church
Coef
TStat
ME
1 club
0.177
2.36
0.009
2-3 clubs
0.282
3.42
0.013
4+ clubs
0.311
2.14
0.016
Church
Sport
Coef
TStat
ME
0.083
4.00
0.014
Sport
Dept of Economics, University of
Sheffield, UK
Coef
TStat
ME
0.152
2.22
0.009
Social Interaction and Stock Market
Participation: Panel Data Analysis, Dynamic
Analysis
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Dynamic model which takes into
account past experience;
Probability of participating in the stock
market may be more likely if the
individual has purchased stocks in the
past;
Alessie et al. (2004): unobserved
heterogeneity & state dependence play
a large role in stock ownership for Dutch
households between 1993 & 1998.
Dept of Economics, University of
Sheffield, UK
Social Interaction and Stock Market
Participation: Panel Data Analysis, Dynamic
Analysis (continued)
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We model the ownership of stocks over the
period 1981 to 2008;
Balanced panel over three time periods
(1981, 1991 and 2008) and 7,467
individuals giving total observations of
22,401.

STOCKit  1 X it '   STOCKit 1   SOCit  i  it  0
Dept of Economics, University of Sheffield, UK

Social Interaction and Stock Market
Participation: Panel Data Analysis, Dynamic
Analysis (continued)
Transition rates in stock market
participation
1981
1991
Stocks at time t
Stocks at t+1
No stocks in 1981
23% hold stocks in 1991
Holds stocks in 1981
54% hold stocks in 1991
No stocks in 1991
26% hold stocks in 2008
Holds stocks in 1991
58% hold stocks in 2008
Dept of Economics, University of Sheffield, UK
Social Interaction and Stock Market
Participation: Panel Data Analysis, Dynamic
Analysis (continued)
Clubs
Church
Sport
Coef
T-Stat
Coef
T-Stat
Coef
T-Stat
Stockt-1
0.980
15.78
0.970
15.37
0.985
15.55
1 club
0.103
3.30
2-3 clubs
0.205
6.52
4+ clubs
0.267
4.80
0.096
3.50
0.084
3.41
1.679
1.80
Church
Sport
RE term
1.604
2.80
1.410
2.10
Dept of Economics, University of Sheffield, UK
Social Interaction and Stock Market
Participation: Panel Data Analysis, Dynamic
Analysis (continued)
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Initial conditions: static reduced form equation
for period 1 using the same covariates &
excluding the lagged dependent variable;
Plus binary controls for the occupation that the
individual was first employed in as identifying
variables;
Significance of the random effect term indicates
that unobserved heterogeneity is important;
Coefficient on stockt-1 indicates state
dependence.
Dept of Economics, University of Sheffield, UK
Conclusion
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First empirical study of stock market
participation & social interaction for the UK;
Our findings support a positive relationship
between social interaction & stock market
participation when both are measured
concurrently;
Cohort data allows us to contribute to the
existing literature in this area by exploring
the panel aspect of the data.
Dept of Economics, University of Sheffield, UK
Conclusion
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We firstly control for unobserved fixed
effects and, secondly, state dependence in
stock ownership.
Timing difference & reverse causality:
positive effect of social interaction remains
when social interaction is measured prior to
stock market participation.
Our findings lend further support for the
importance of social interaction for stock
market participation.
Dept of Economics, University of Sheffield, UK