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Trusting the Stock Market

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  • LUIGI GUISO
  • PAOLA SAPIENZA
  • LUIGI ZINGALES

Abstract

We study the effect that a general lack of trust can have on stock market participation. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function of the objective characteristics of the stocks and the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. In Dutch and Italian micro data, as well as in cross‐country data, we find evidence consistent with lack of trust being an important factor in explaining the limited participation puzzle.

Suggested Citation

  • Luigi Guiso & Paola Sapienza & Luigi Zingales, 2008. "Trusting the Stock Market," Journal of Finance, American Finance Association, vol. 63(6), pages 2557-2600, December.
    • Handle: RePEc:bla:jfinan:v:63:y:2008:i:6:p:2557-2600
    DOI: 10.1111/j.1540-6261.2008.01408.x
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    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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