Hostname: page-component-848d4c4894-nmvwc Total loading time: 0 Render date: 2024-07-07T00:54:08.851Z Has data issue: false hasContentIssue false
  • English
  • Français

Information vs. Entry Costs: What Explains U.S. Stock Market Evolution?

Published online by Cambridge University Press:  06 April 2009

Joel Peress
Joel Peress
Affiliation:
joel.peress@insead.edu, INSEAD, Department of Finance, Boulevard de Constance, 77305 Fontainebleau Cedex, France.
Get access Rights & Permissions [Opens in a new window]

Abstract

I investigate whether changes in stock market participation costs can explain the long-term increase in the number of U.S. stockholders. I separate these costs into two components: an information cost (the cost of collecting market information), and an entry cost (all other costs, including commissions and fees), and disentangle their general equilibrium implications in a noisy rational expectations economy. While a falling information cost cannot explain the observed increase in stock market participation, a falling entry cost can account for this plus several other features of the U.S. economy, including the falling equity premium, rising return variances, and the boom in passive relative to active investing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 3 , September 2005 , pp. 563 - 594
Copyright
Copyright © School of Business Administration, University of Washington 2005

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abel, A. “The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks.” American Economic Review, 91 (2001), 128–148.Google Scholar
Alessie, R.; Hochguertel, S.; and Van Soest, A.. “Household Portfolios in the Netherlands.” In Household Portfolios, Guiso, L., Haliassos, M., and Jappelli, T., eds. Boston, MA: MIT Press (2001).Google Scholar
Allen, F., and Gale, D.. “Limited Market Participation and Volatility of Asset Prices.” American Economic Review, 84 (1994), 933–955.Google Scholar
Banz, R. “The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, 9 (1981), 3–18.Google Scholar
Barry, C., and Brown, S.. “Differential Information and the Small Firm Effect.” Journal of Financial Economics, 13 (1984), 283–294.Google Scholar
Bernheim, B., and Garret, D.. “The Determinants and Consequences of Financial Education in the Workplace: Evidence from a Survey of Households.” NBER Working Paper 5667 (1996).Google Scholar
Bernheim, B.; Garret, D.; and Maki, D.. “Education and Saving: The Long-Term Effects of High School Financial Curriculum Mandates.” NBER Working Paper 6085 (1997).CrossRefGoogle Scholar
Bertaut, C., and Starr-McCluer, M.. “Household Portfolios in the United States.” Federal Reserve Board Discussion Paper (2000).Google Scholar
Borsch-Supan, A., and Eymann, A.. “Household Portfolios in Germany.” In Household Portfolios, Guiso, L., Haliassos, M., and Jappelli, T., eds. Boston, MA: MIT Press (2001).Google Scholar
Campbell, J.; Lettau, M.; Malkiel, B.; and Xu, Y.. “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk.” Journal of Finance, 56 (2001), 1–43.Google Scholar
Chen, H.; Noronha, G.; and Singal, V.. “Investor Awareness and Market Segmentation: Evidence from S&P 500 Index Changes.” Journal of Finance, 59 (2004), 1901–1930.CrossRefGoogle Scholar
Chiteji, N. S., and Stafford, F. P.. “Portfolio Choices of Parents and Their Children as Young Adults: Asset Accumulation by African-American Families.” American Economic Review Papers and Proceedings, 89 (1999), 377–380.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Market Liquidity and Trading Activity.” Journal of Finance, 56 (2001), 501–530.Google Scholar
Coval, J., and Moskowitz, T.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2107.CrossRefGoogle Scholar
Cready, W. “Information Value and Investor Wealth: The Case of Earnings Announcements.” Journal of Accounting Research, 26 (1988), 1–27.Google Scholar
Donkers, B., and Van Soest, A.. “Subjective Measures of Household Preferences and Financial Decisions.” Journal of Economic Psychology, 20 (1999), 613–642.CrossRefGoogle Scholar
Duflo, E., and Saez, E.. “Participation and Investment Decisions in a Retirement Plan: The Influence of Colleagues' Choices.” Journal of Public Economics, 85 (2002), 121–148.CrossRefGoogle Scholar
Fama, E., and French, K.. “The Equity Premium.” Journal of Finance, 57 (2002), 637–659.CrossRefGoogle Scholar
Foerster, S. R., and Karolyi, G. A.. “The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States.” Journal of Finance, 54 (1999), 981–1013.Google Scholar
French, K., and Poterba, J.. “Investor Diversification and International Equity Markets.” American Economic Review, 81 (1991), 222–226.Google Scholar
Frieder, L., and Subrahmanyam, A.. “Brand Perceptions and the Market for Common Stock.” Working Paper, UCLA (2002).Google Scholar
Grossman, S. J., and Stiglitz, J. E.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (1980), 393–408.Google Scholar
Grullon, G.; Kanatas, G.; and Weston, J.. “Advertising, Breadth of Ownership, and Liquidity.” Review of Financial Studies, 17 (2004), 439–461.CrossRefGoogle Scholar
Guiso, L., and Jappelli, T.. “Household Portfolios in Italy.” In Household Portfolios, Guiso, L., Haliassos, M., and Jappelli, T., eds. Boston, MA: MIT Press (2001).Google Scholar
Guiso, L.; Haliassos, M.; and Jappelli, T.. “Household Portfolios in Italy.” In Household Portfolios, Guiso, L., Haliassos, M., and Jappelli, T., eds. Boston, MA: MIT Press (2001).Google Scholar
Haliassos, M., and Bertaut, C. C.. “Why Do So Few Hold Stocks?” Economic Journal, 105 (1995), 1110–1129.Google Scholar
Hau, H. “Competitive Entry and Endogenous Risk in the Foreign Exchange Market.” Review of Financial Studies, 11 (1998), 757–787.Google Scholar
He, H., and Wang, J.. “Differential Information and Dynamic Behavior of Stock Trading Volume.” Review of Financial Studies, 8 (1995), 919–972.CrossRefGoogle Scholar
Heaton, J., and Lucas, D.. “Stock Prices and Fundamentals.” NBER Macroeconomics Annual, 14 (1999), 213–242.Google Scholar
Heaton, J., and Lucas, D.. “Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk.” Journal of Finance, 55 (2000), 1163–1198.Google Scholar
Hirshleifer, D. “Residual Risk, Trading Costs, and Commodity Futures Risk Premia.” Review of Financial Studies, 1 (1988), 173–193.CrossRefGoogle Scholar
Hong, H.; Kubik, J.; and Stein, J.. “Thy Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers.” Working Paper, Stanford Univ. (2002).Google Scholar
Huberman, G. “Familiarity Breeds Investment.” Review of Financial Studies, 14 (2001), 659–680.Google Scholar
Jones, C. “A Century of Stock Market Liquidity and Trading Costs.” Working Paper, Columbia Univ. (2002).CrossRefGoogle Scholar
Kadlec, G. B., and McConnell, J. J.. “The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings.” Journal of Finance, 49 (1994), 611–636.Google Scholar
Kang, J.-K., and Stulz, R.. “Why is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan.” Journal of Financial Economics, 46 (1994), 3–28.Google Scholar
Keynes, J. M. “The General Theory of Employment, Interest, and Money.” Fort Washington, PA: Harvest Books (1989).Google Scholar
King, M., and Leape, J.. “Asset Accumulation, Information and the Life Cycle.” NBER Working Paper 2392 (1987).CrossRefGoogle Scholar
Lakonishok, J., and Maberly, E.. “The Weekend Effect: Trading Patterns of Individual and Institutional Investors.” Journal of Finance, 45 (1990), 231–243.CrossRefGoogle Scholar
Lee, C. “Earnings News and Small Traders.” Journal of Accounting and Economics, 15 (1992), 265–302.Google Scholar
Lewellen, W.; Lease, R.; and Schlarbaum, G.. “Patterns of Investment Strategy and Behavior among Individual Investors.” Journal of Business, 50 (1977), 296–313.Google Scholar
Luttmer, E. G. J. “What Level of Fixed Costs Can Reconcile Consumption and Stock Returns?” Journal of Political Economy, 107 (1999), 969–997.CrossRefGoogle Scholar
Mankiw, G. N., and Zeldes, S. P.. “The Consumption of Stockholders and Nonstockholders.” Journal of Financial Economics, 29 (1991), 97–112.Google Scholar
Marshall, D. A., and Parekh, N. G.. “Can Cost of Consumption Adjustment Explain Asset Pricing Puzzles?” Journal of Finance, 54 (1999), 623–654.Google Scholar
Massa, M., and Simonov, S.. “Behavioral Biases and Investment.” Working Paper, INSEAD (2003).Google Scholar
Merton, R. “A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance, 42 (1987), 483–510.CrossRefGoogle Scholar
Miller, D. “The Market Reaction to International Cross-Listings: Evidence from Depositary Receipts.” Journal of Financial Economics, 51 (1999), 103–123.Google Scholar
Pagano, M. “Market Size, the Informational Content of Stock Prices and Risk.” CEPR Working Paper 144 (1986).Google Scholar
Perraudin, W., and Sørensen, B.. “The Demand for Risky Assets: Sample Selection and Household Portfolios.” Journal of Econometrics, 97 (2000), 117–144.Google Scholar
Peress, J. “Wealth, Information Acquisition and Portfolio Choice.” Review of Financial Studies, 17 (2004), 879–914.CrossRefGoogle Scholar
Rea, J.; Reid, B.; and Lee, T.. “Mutual Fund Costs, 1980–1998.” Perspective. Washington, DC: Investment Company Institute (1999).Google Scholar
Reinganum, M. “The Anomalous Stock Market Behavior of Small Firms in January: Empirical Tests for Tax-Loss Selling Effects.” Journal of Financial Economics, 12 (1983), 89–104.Google Scholar
Saito, M. “Limited Participation and Asset Pricing.” Working Paper, Univ. of British Columbia (1996).Google Scholar
Schwert, W. “Size and Stock Returns, and Other Empirical Regularities.” Journal of Financial Economics, 12 (1983), 3–12.Google Scholar
Stein, J. “Informational Externalities and Welfare-Reducing Speculation.” Journal of Political Economy, 95 (1987), 1123–1145.CrossRefGoogle Scholar
Verrecchia, R. E. “Information Acquisition in a Noisy Rational Expectations Economy.” Econometrica, 50 (1982), 1415–1430.CrossRefGoogle Scholar
Vissing-Jørgensen, A. “Limited Stock Market Participation.” Ph.D. Diss., MIT (1998).Google Scholar
Vissing-Jørgensen, A. “Towards an Explanation of Household Portfolio Choice Heterogeneity: Non-financial Income and Participation Cost Structures.” Working Paper, Univ. of Chicago (2002).Google Scholar
Weisbenner, S. “Do Pension Plans with Participant Investment Choice Teach Households to Hold More Equity?” Federal Reserve Board Discussion Paper (1999).Google Scholar
West, K. D. “Dividend Innovations and Stock Price Volatility.” Econometrica, 56 (1988), 37–61.Google Scholar
Yitzhaki, S. “The Relation between Return and Income.” Quarterly Journal of Economics, 102 (1987), 77–95.Google Scholar