Households in many countries aren’t investing enough, according to Chicago Booth’s Hans B. Christensen and Mark G. Maffett and Booth PhD candidate Lauren Vollon. Owning stocks can be good for families and drive economic growth—yet the level of equity ownership, especially outside of the United States, is less than what financial theory would consider ideal.
But improving financial-market regulation could help, their research suggests. Christensen, Maffett, and Vollon analyzed how strengthened securities regulation across the European Union affected household investment. Revelations of corporate malfeasance erode trust and deter households from investing in equity markets, but more-stringent securities regulation may restore investor faith, their research suggests.
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Is Dodd-Frank an Instrument of Social Change?Christensen, Maffett, and Vollon focused their work on two EU measures, the Market Abuse Directive (MAD) and the Markets in Financial Instruments Directive (MiFID), which prohibit insider trading and market manipulation and enhanced consumer protections in the financial-services industry. The directives were implemented in 31 member states of the European Economic Area at various times over several years. The staggered rollout enabled the researchers to assess changes in household-equity ownership within countries that adopted the directives compared with investment behavior in countries that hadn’t yet done so.
“The multi-country setting allows us to examine spillover effects across countries and to exploit the rich variation in trust and culture that exists in Europe,” write Christensen, Maffett, and Vollon. From 2000 to 2013, households significantly increased the proportion of their total liquid assets that they invested directly in stock markets, in response to the regulations, the researchers find. The MAD measure resulted in a 12 percent increase in average household-equity ownership, and the MiFID legislation, a 5 percent gain.
The researchers also studied foreign investments by mutual funds across member states where the directives were implemented. Supporting the theory that investments rise when households have more trust in markets, the findings demonstrate that when a country adopted the directives, mutual funds from other EU nations increased investments in the adopting country by 13 percent.
By leveling the playing field for market participants, MAD and MiFID significantly increased the willingness of households to place more of their wealth in the equity market, the researchers find. They conclude that regulation can increase confidence in financial markets by disciplining those who don’t play by the rules.
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