Theoretical models predict that ambiguity is an asset pricing factor in addition to risk, however few of them have been tested in the real market. This thesis tests one of the hypotheses that, investors’ propensity to invest in stocks is reduced when ambiguity in the marketplace increases. The hypothesis is tested by using equity fund flows and households’ equity holding as measurements of the market participation, and using dispersion in analysts’ forecasts about aggregate returns as measurement of ambiguity. The results confirm this hypothesis, since the increases in ambiguity are significantly and negatively related to equity fund flows, as well as the likelihood that the average household invests in equities. Moreover, the results also find that the fund flows in non-dividend paying stocks are more sensitive to the changes in ambiguity, and investors transfer capital from the equity market into more liquid asset classes during high-ambiguity periods. In addition, this thesis also tests whether there is heterogeneity in individuals’ ambiguity aversion, and examines the psychological roots of ambiguity aversion. FNE theory explains ambiguity aversion as the result of fearing negative evaluation from others. It predicts that married households are more ambiguity averse; while households with higher income and education, or households that are more mature, are less ambiguity averse. On the other hand, self-evaluation theory explains ambiguity aversion as the result of minimizing anticipated regret. It predicts that households that are more optimistic, or have less income, are less ambiguity averse; while households that have negative market experience, or have higher income, are more ambiguity averse. The results show that married households, or households with high income / negative market experience, are more ambiguity averse; and households that are more optimistic / more mature, are less ambiguity averse. Therefore, both theories have successful predictions, suggesting that the ambiguity aversion is the combined result of the two motivations.

abstract: Recent research finds that there is significant variation in stock market participation by state and suggests that there might be state-specific factors that determine household stock market participation in the United States. Using household survey data, I examine how accounting quality of public companies at the state level affects households’ stock market participation decisions. I find that households residing in states where local public companies have better accounting quality are more likely to invest in stocks. Moreover, those households invest greater amounts of their wealth in the stock market. Cross-sectional tests find that the effect of accounting quality on stock market participation is more pronounced for less affluent and less educated households, consistent with prior findings that lacking familiarity with and trust in the stock market is an important factor deterring those types of households from stock investments. In state-level tests, I find that these household outcomes affect income inequality, which is less severe in states where high public-firm accounting quality spurs more stock market participation by poorer households. Conversely, in states where public firms have lower accounting quality, stock market participation among poorer households is less common, and a larger share of high equity returns accrues to richer households, exacerbating income inequality. / Dissertation/Thesis / Doctoral Dissertation Accountancy 2020

This research studies the moderating effect of country-specific social connectedness on the relation between financial literacy and stock market participation. This is done by using the extensive and multi-country SHARE data. The positive relation between financial literacy and stock market participation is reconfirmed. Moreover, the findings show that country-specific social connectedness significantly moderates the relation between financial literacy and stock market participation. The findings are robust and indicate that the predictive power of financial literacy on stock market participation decreases if country-specific social connectedness increases. This research is following up on contemporary literature and contributes to the explanation of the stock market participation puzzle on a macroeconomic scale.

Until now, the majority of individuals does not hold stocks. In our sample, only 20.5% of individuals directly or indirectly participate in the stock market. Using data from the SHARE Study (N=54,636), we investigate at the individual level the effect of personality traits and at the country level the effect of Quality of Government while controlling for several sociodemographic factors. We prove that Openness to experience and Agreeableness significantly influence stock market participation. Agreeable people who are less open to new experiences are more likely to hold stocks. We also report mixed effects for Conscientiousness, Extraversion and Neuroticism. Extraversion seems to influence stock market participation through its effect on education and Neuroticism through its effect on both education and Quality of Government. Additionally, countries with a higher level of Quality of Government have a higher participation rate. Lastly, we find that the strength of the effects of Openness and Extraversion depends on the level of Quality of Government. We contribute to the explanation of the non-participation puzzle and give implications for policy makers.

This thesis consists of four self-contained papers related to the change of market structure and the quality of equity market. In Paper [I] we found, by using of a Flexible Dynamic Component Correlations (FDCC) model, that the creation of a common cross-border stock trading platform has increased the long-run trends in conditional correlations between foreign and domestic stock market returns. In Paper [II] we study whether the creation of a uniform Nordic and Baltic stock trading platform has affected weak-form information efficiency. The results indicate that the stock market consolidations have had a positive effect on the information efficiency and turnover for an average firm. The merger effects are, however, asymmetrically distributed in the sense that relatively large (small) firms located on relatively large (small) markets experience an improved (reduced) information efficiency and turnover. Although the results indicate that changes in the level of investor attention (measured by turnover) may explain part of the changes in information efficiency, they also lend support to the hypothesis that merger effects may partially be driven by changes in the composition of informed versus uninformed investors following a stock. Paper [III] analyzes whether the measured level of trust in different countries can explain bilateral stock market correlations. One finding is that generalized trust among nations is a robust predictor for stock market correlations. Another is that the trust effect is larger for countries which are close to each other. This indicates that distance mitigates the trust effect. Finally, we confirm the effect of trust upon stock market correlations, by using particular trust data (bilateral trust between country A and country B) as an alternative measurement of trust. In Paper [IV] we present the impact of the stock market mergers that took place in the Nordic countries during 2000 – 2007 on the probabilities for stock price jumps, i.e. for relatively extreme price movements. The main finding is that stock market mergers, on average, reduce the likelihood of observing stock price jumps. The effects are asymmetric in the sense that the probability of sudden price jumps is reduced for large and medium size firms whereas the effect is ambiguous for small size firms. The results also indicate that the market risk has been reduced after the stock market consolidations took place.

No description available.

Abstract This dissertation contributes to the understanding of investor behavior by using personality traits to help explain investor decision-making. The work is novel, as personality traits have not been used much in finance research. The data used in this dissertation is also new to the field, consisting of observations on personality traits and socioeconomic variables combined with official records of investors’ stockholdings. The first essay provides evidence that personality traits significantly affect the stock market participation decision. The essay shows that subscales of traits (i.e., lower-level traits or facets) can provide a better model of behavior, with some subscales of a single higher-level trait having opposite effects on behavior. The novelty seeking subscales exploratory excitability and extravagance have positive and negative effects, respectively, and the reward dependence subscales dependence and sentimentality have positive and negative effects, respectively. The magnitudes of the effects are large, with marginal effects on the probability of being a stock market participant of up to four percentage points. The second essay explores the relationship between personality traits and risk aversion. We estimate risk aversion from equity holdings and from survey measures. The traits display a distinctive pattern of correlations with the estimates of risk aversion. Some traits are significantly related to observed portfolio characteristics such as portfolio volatility, number of stocks held, and trading frequency. The pattern of the traits’ relationships with the various measures of risk aversion indicates that personality traits should not be considered as merely drivers of risk aversion but as preference parameters distinct from risk aversion. The third essay shows that personality traits are related to an investor’s preferences for value versus growth stocks and for small capitalization stocks versus large capitalization stocks. We find more extravagant individuals favor large capitalization growth stocks; more impulsive people favor small capitalization growth stocks; more sentimental investors prefer small capitalization value stocks; and more social investors prefer small capitalization stocks with a tilt towards value. / Tiivistelmä Tämä tutkimus auttaa ymmärtämään sijoituskäyttäytymistä selittämällä sijoittajien päätöksentekoa heidän luonteenpiirteillään. Tutkimustuloksilla on uutuusarvoa, sillä luonteenpiirteiden merkitystä ei ole juurikaan tutkittu rahoitustutkimuksessa. Tutkimusaineisto on sekin luonteeltaan tavanomaisesta poikkeava, koostuen yksityishenkilöiden luonteenpiirteitä ja sosioekonomista asemaa kuvaavista muuttujista sekä heidän osakeomistustaan koskevista virallisista rekisteritiedoista. Tutkimuksen ensimmäinen essee osoittaa, että luonteenpiirteillä on merkittävä vaikutus yksityishenkilön päätökseen toimia osakemarkkinoilla. Tutkimustulosten mukaan osallistumispäätöstä kyetään ennustamaan paremmin käyttämällä luonteenpiirteiden pääluokkia mittaavien muuttujien sijasta luonteenpiirteiden alaluokkia mittaavia muuttujia. Tämä selittyy sillä, että alaluokkia mittaavilla muuttujilla on eräissä tapauksissa vastakkaismerkkisiä, pääluokkaa mittaavassa muuttujassa toisensa peittäviä, yhteyksiä osallistumispäätökseen. Tämä voidaan havaita muun muassa pääluokkaan ”elämyshakuisuus” kuuluvien ”kokeilunhalun” (+) ja ”tuhlaavaisuuden” (-) kohdalla, samoin kuin pääluokkaan ”palkkioriippuvuus” kuuvilla ”riippuvuudella” (+) ja ”sentimentaalisuudella” (-). Kaiken kaikkiaan luonteenpirteitä mittaavien muuttujien vaikutuksen suurusluokka on korkea, vastaten yksittäisen muuttujan kohdalla jopa neljän prosentin marginaalivaikutusta osakemarkkinoille osallistumisen todennäköisyyteen. Toinen essee tarkastelee luonteenpiirteiden ja riskinkarttamisen asteen välistä yhteyttä. Tutkimuksessa mitataan yksityishenkilön riskinkarttamisen astetta toisaalta hänen osakeomistuksensa rakenteen perusteella ja toisaalta kyselytutkimuksen avulla. Sijoittajien luonteenpiirteiden ja muodostettujen riskinkarttamisen astetta mittaavien muuttujien väliset korrelaatiot muodostavat selkeän rakenteen. Eräät luonteenpiirteet ovat merkitsevässä riippuvuussuhteessa muun muassa sijoittajan osakesalkun volatiliteettiin, salkkuun sisällytettyjen osakesarjojen määrään ja sijoittajan kaupankäyntiaktiivisuuteen. Luonteenpiirteitä kuvaavien muuttujien ja riskinkarttamisastetta kuvaavien muuttujien välisen yhteyden perusteella luonteenpiirteitä tulisi tarkastella enneminkin erillisinä sijoittajien preferenssejä kuvaavina muuttujina kuin riskinkarttamisasteen taustalla olevina perustekijöinä. Kolmas essee osoittaa, että luonteenpiirteet ovat yhteydessä siihen, suosiiko sijoittaja arvo- vs. kasvuosakkeita ja/tai alhaisen markkina-arvon vs. korkean markkina-arvon yhtiöiden osakkeita. Tutkimustulokset osoittavat, että ”tuhlaavammat” sijoittajat suosivat korkean markkina-arvon omaavia kasvuosakkeita, kun taas ”impulsiivisemmat” sijoittajat suosivat alhaisen markkina-arvon omaavia kasvuosakkeita. Vastaavasti ”sentimentaalisemmat” sijoittajat suosivat ylipäätään alhaisen markkina-arvon omaavia arvo-osakkeita, ”sosiaalisten” sijoittajien suosiessa heidänkin alhaista markkina-arvoa, suunnaten kiinnostustaan samalla arvo-osakkeisiin.

År 2007 – 2008 var Finanskrisen i full kraft vilket forcerade många individer till att träda ut från aktiemarknaden. Ett hårdare finansiellt klimat och en mer komplex produktmarknad har resulterat i att alla individer inte kunnat parera marknadens hastiga förändringar och därmed invänta en framtida marknadsåterhämtning. Detta utfall kan således ha varit förknippat med stora förluster av finansiella tillgångar. Tidigare forskning indikerar att det existerar ett behov av finansiell förmåga vid dessa typer av krissituationer. Är investerares finansiella förmåga en lösning här? Och isåfall, vilka kunskaper är mest centrala för att uppnå en hög finansiell förmåga? I studiens teoretiska referensram redovisas tidigare forskning och en övergripande inblick ges i investerares portföljsammansättningar samt diversifiering av dessa. Först redogörs det för individers finansiella förmåga som innehar en central roll vid investeringar på aktiemarknaden då en hög finansiell förmåga tenderar att medföra möjligheter som kan frambringa goda ekonomiska förutsättningar. Vidare presenteras grundläggande portföljteori följt av diverse riskpreferenser som existerar i denna kontext. Därefter beskrivs de effekter som ofta uppkommer med i samband med finanskriser.  Syftet med studien är att undersöka hur ingenjörer och ekonomer bygger upp och omfördelar sina aktieportföljer. Ett grundläggande kriterium avseende urvalet är att de har erhållit en examen från Uppsala Universitet, inom antingen ekonomi eller ingenjörsskap, mellan år 2000 till 2018. Det centrala här är att identifiera vilka riskpreferenser som existerar för de båda urvalsgrupperna samt att analysera aktiemarknadsdeltagandet – detta för att identifiera möjliga skillnader utbildningarna emellan.  I kölvattnet av Finanskrisen har flertalet investerare uppvisat tendenser till ett mer riskaversivt beteendemönster där resultaten visar på ett reducerat risktagande efter Finanskrisens avslut (2009 – 2018) i förhållande till perioden innan Finanskrisens uppkomst (2000 – 2006). När effekten av Finanskrisen var som starkast (2007 – 2008) uppvisade investerarna ett tydligt avståndstagande från aktiemarknaden, där de som trots allt valde att stanna kvar på marknaden eftersökte mindre riskfyllda investeringsalternativ. Resultaten pekar på att urvalets ekonomer handlar utifrån en mer riskaversiv utgångspunkt gentemot ingenjörer som istället tenderar att uppvisa en mer riskneutrala inställning till marknadens investeringsalternativ. / During 2007 – 2008 when the global financial crisis was in full effect, a majority of the investors on the stock market were forced to exit due to a harsher financial environment and increasing complexity of financial products. The results of this outcome were associated with losses of financial assets for the investors. Previous research has identified and supported the need for financial literacy during financial crises. Could financial literacy be a key factor in resolving these issues? And if so, what kind of knowledge can lead to greater financial literacy? The purpose of this study is to examine how engineers and economists build and rebalance their portfolios. The aim has been to identify the risk preferences that exists for each target group, and to analyze stock market participation – before, during, and after the global financial crisis. This in turn, is crucial for the ability to compare the investors university education and to investigate possible differences in terms of knowledge. The results show that the investors in this study display risk averse behaviours and hold assets associated with risks that are lower than the market risk. Furthermore, economists tend to be more risk averse than engineers which in comparison are more risk neutral in their market behaviours.

This thesis consists of an introductory part and four self-contained papers related to individual financial behavior and risk-taking in financial markets. In Paper [I] we estimate within-family and community social interaction effects upon an individual’s stock market entry, participation, and exit decision. Interestingly, community sentiment towards the stock market (based on portfolio outcomes in the community) does not influence individuals’ likelihood to enter, while a positive sentiment increases (decreases) the likelihood of participation (exit). Overall, the results stress the importance of accounting for family social influence and highlight potentially important differences between family and community effects in individuals’ stock market participation. In Paper [II] novel evidence is provided indicating that the influence from family (parents and partners) and peer social interaction on individuals’ stock market participation vary over different types of individuals. Results imply that individuals’ exposure to, and valuation of, stock market related social signals are of importance and thus, contribute to the understanding of the heterogeneous influence of social interaction. Overall, the results are interesting and enhance the understanding of the underlying mechanisms of social interaction on individuals’ financial decision making. In Paper [III] the impact of divorce ­­­on individual financial behavior is empirically examined in a dynamic setting. Evidence that divorcing individuals increase their saving rates before the divorce is presented. This may be seen as a response to the increase in background risk that divorce produces. After the divorce, a negative divorce effect on individual saving rates and risky asset shares are established, which may lead to disparities in wealth accumulation possibilities between married and divorced. Women are, on average, shown to not adjust their precautionary savings to the same extent as men before the divorce. I also provide tentative evidence that women reduce their financial risk-taking more than men after a divorce, which could be a result of inequalities in financial positions or an adjustment towards individual preferences.   Paper [IV] provides novel empirical evidence that gender identity is of importance for individuals’ financial risk-taking. Specifically, by use of matching and by dividing male and females into those with “traditional” versus “nontraditional” gender identities, comparison of average risk-taking between groupings indicate that over a third (about 35-40%) of the identified total gender risk differential is explained by differences in gender identities. Results further indicate that risky financial market participation is 19 percentage points higher in groups of women with nontraditional, compared with traditional, gender identities. The results, obtained while conditioning upon a vast number of controls, are robust towards a large number of alternative explanations and indicate that some individuals (mainly women) partly are fostered by society, through identity formation and socially constructed norms, to a relatively lower financial risk-taking.

One of the main tenets of finance is diversification. Investors choose their portfolios so as to diversify away their idiosyncratic risk. In four essays included into this dissertation the implications of less than perfect diversification on investors’ performance and asset pricing are investigated. In Essay I we examine one particular instance in which diversification may play a role in a non-portfolio type of investment: the IPO. In an IPO, a set of potentially non-diversified investors – the existing shareholders – reduce their holdings of a company, listing the company and selling part of its shares. Our contribution is to show how portfolio diversification of controlling investors in private companies affects the IPO process. We demonstrate that companies sold by more diversified shareholders are less likely to be taken public, but when doing so they are priced more favourably. In Essays II and III we investigate the impact of incomplete diversification and imperfect risk-sharing on asset returns. Our argument is that the smaller shareholder base a firm has, the larger the fraction of company idiosyncratic risk on average its investors have to carry, and the higher return they would demand for that. We demonstrate that there is a negative and significant relationship between companies’ shareholder base and stock returns as well as between changes in shareholder base and stock returns. This effect is more pronounced for younger companies, but remains significant for seasoned companies as well. Applying our analysis to corporate events we demonstrate that abnormal performance following the repurchase can be partially explained by the reduction in the shareholders base resulting from repurchase. In Essay IV I investigate the motives behind one of the most puzzling examples of investors’ underdiversification – the local bias. Contrary to the predictions of classical financial theories, investors on aggregate overweight stock of proximate companies in their portfolios. I demonstrate that being placed in new community, individual investors not only soon become biased towards companies with establishments in this new locality, but they also obtain superior returns from these investments. Investing into the local stocks, therefore, is to a large degree rational. / Diss. Stockholm : Handelshögskolan, 2005 S. ii-vi: sammanfattning, s. 1-134: 4 uppsatser