Household Debt and Stock Market Participation

Lack of stock market participation remains one of the most debated puzzles in household finance. We survey individual investors on the effect of personal debt on stock investments. We find significant correlations between household debt, financial constraints, and equity investments. Investors who have less financial constraints, defined as higher home equity or a better access to credit card debt, invest more in stocks. While homeowners also have more stock investments, having a mortgage loan lowers the stock market participation. The perceived equity risk premium, defined as the difference between the expected stock market return of the individual and the mortgage interest that (s)he pays, is positively related to stock market participation. Remarkably, 55% of non-investors assert that they will never invest in stocks.