Access to Credit and Stock Market Participation

Abstract

We exploit staggered removals of interstate banking restrictions to identify the causal effect of access to credit on households’ stock market participation and asset allocation. Using micro data on retail brokerage accounts and proprietary data on personal credit histories, we document two effects of the loosening of credit constraints on households’ financial decisions. First, households enter the stock market by opening new brokerage accounts. Second, households increase their asset allocation to risky assets and reduce their allocation to cash, consistent with a lower need for precautionary savings. The effects are stronger for younger and more credit constrained investors. Overall, we establish one of the first direct links between access to credit and households’ investment decisions.