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Do Bankruptcy Protection Levels Affect Households' Demand for Stocks?

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  • Dal Borgo Mariela

Abstract

This paper examines empirically the effect of the level of personal bankruptcy protection in the US on households' demand for financial assets. A Chapter 7 bankruptcy allows protecting the home equity up to a certain limit or "exemption". Previous literature shows that such exemption biases investment towards home equity. This paper tests whether it also lowers investment in stocks, which are not protected in bankruptcy. Using an instrumental variable approach, I estimate a lower stock market participation when the home equity is below the exemption, but the result is not robust, and households at higher risk of bankruptcy do not exhibit a stronger response. Moreover, investment in home equity is not higher when the home is fully protected. These findings suggest no substantial portfolio distortions from the level of home equity that is protected in bankruptcy.

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  • Dal Borgo Mariela, 2021. "Do Bankruptcy Protection Levels Affect Households' Demand for Stocks?," Working Papers 2021-03, Banco de México.
    • Handle: RePEc:bdm:wpaper:2021-03
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    More about this item

    Keywords

    Personal bankruptcy law; Home equity protection; Stock market participation; Portfolio allocation;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G00 - Financial Economics - - General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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