Is financial advice a cure-all or the icing on the cake for financial literacy? Evidence from financial market participation in China

We examine how financial advice interacts with financial literacy to shape household decisions on stock market participation in China. Particularly, we investigate how the effect of financial advice varies with economic expectations, preferences for asset diversification and the level of financial literacy. Feeding the data of 5274 households into a Probit model that predicts the probability of holding stocks, we find that, while an increase in financial literacy significantly raises the stock market participation of all households, seeking financial advice only increases the participation for those households which have a preference for asset diversification or which have an optimistic expectation about the economy. Moreover, the effect of financial advice is concentrated on households with high financial literacy, implying that an insufficient level of financial literacy is the reason for the poor performance of financial advice in China. We also examine if there are influential trust or quality concerns which would reduce the effectiveness of financial advice but we find no significant evidence for it.     

An internal control perspective on the market value consequences of IT operational risk events

IT internal controls are an important component of an organization's arsenal of internal controls. Upon conceptualizing failures of operational IT systems, or what we call IT operational risk events, as signals of IT internal control weaknesses, we theorize about these events' impact on internal control objectives in general and about how this impact is influenced by the regulatory environment in particular. We then perform an event study to examine the economic impact of a diversified sample of IT operational risk events from the U.S. financial services industry during 1985–2009. We specifically test the impact of contextual factors on the degree of this effect, including the events' target (confidentiality, integrity, or availability of IT assets), the source of disclosure (regulatory or voluntary), the enactment of the Sarbanes–Oxley Act, and firm-specific attributes. We find that investors penalize firms most strongly for experiencing events that compromise the availability of IT systems, consistent with our prediction that these events more negatively impact the reliability of financial reporting and the efficiency and effectiveness of operations. This result contrasts extant empirical studies that are predominantly concerned with information and security breaches. We find also that investors' penalty is the strongest for firms experiencing IT operational risk events that occurred after the passing of the Sarbanes–Oxley Act or were disclosed by a regulatory body. Finally, the market reaction is shown to be stronger for firms with high growth potential, firms that are larger, riskier, and are in the banking sector. Implications for research and practice are discussed along with directions for future research.     

Stereotypes in financial literacy: Evidence from PISA

We examine gender differences in financial literacy among high school students in Italy using data from the 2012 Programme for International Student Assessment (PISA). Gender differences in financial literacy are large among the young in Italy. They are present in all regions and are particularly severe in the South and the Islands. Combining the rich PISA data with a variety of other indicators, we provide a thorough analysis of the potential determinants of the gender gap in financial literacy. We find that parental background, in particular the role of mothers, matters for the financial knowledge of girls. Moreover, we show that the social and cultural environment in which girls and boys live plays a crucial role in explaining gender differences. We also show that history matters: Medieval commercial hubs and the nuclear family structure created conditions favorable to the transformation of the role of women in society, and shaped gender differences in financial literacy as well. We discuss the changes that are needed to close the gap in financial knowledge among the young.     

An Empirical Analysis of the Effect of Financial Education on Graduating Business Students’ Perceptions of Their Retirement Planning Familiarity,Motivation, and Preparedness

Today's multifaceted and dynamic financial environment requires a high level of individual financial literacy to ensure that sound financial behaviors are the norm. Unfortunately, many individuals have limited knowledge regarding financial issues and are ill prepared to make sound financial choices. The purpose of this article was to benchmark and then determine if graduating business students’ perception of their retirement planning familiarity, motivation, and preparedness improved after taking a semester‐long course in Personal Risk Management and Insurance (PRMI). We discovered that business students were more financially literate than nonbusiness students and that business students’ familiarity with retirement plans and personal level of readiness to make retirement planning decisions improved significantly after taking the principles class. Specifically, we showed that only 15.8 percent and 42.3 percent of the nonbusiness and business control students, respectively, felt adequately prepared to make retirement decisions, while 82 percent of the business students who completed the PRMI class felt prepared. Ex post, graduating seniors who were exposed to coursework covering life‐cycle risks and options to treat those risks perceived that they are leaving college with a better ability to meet the financial challenges that await them. Last, we showed that significant differences existed in retirement plan and investment familiarity based on gender. Our findings provide support for including financial literacy as a general education requirement at colleges and universities.     

Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?

Financial development is critical for growth, but its microdeterminants are not well understood. We test leading theories of low demand for financial services in emerging markets, combining novel survey evidence from Indonesia and India with a field experiment. We find a strong correlation between financial literacy and behavior. However, a financial education program has modest effects, increasing demand for bank accounts only for those with limited education or financial literacy. In contrast, small subsidies greatly increase demand. A follow‐up survey confirms these findings, demonstrating that newly opened accounts remain open and in use 2 years after the intervention.     

Why do individuals not participate in the stock market?

We use a representative survey to study economic and non-economic factors that affect stock market participation. We find that many individuals suffer from inertia in the sense that they do not want to take the time and effort to invest in stocks. Inertia also explains stock market participation in addition to earlier documented factors such as actual and perceived financial literacy, trust, and the personal equity risk premium (PERP). A high percentage of non-investors (66%) assert that they will never invest in stocks. We find that inertia affects this assertion both directly and indirectly through factors such as age and gender.     

Wealth and risk implications of the Dodd-Frank Act on the U.S. financial intermediaries

We contribute to the current regulatory debate by examining the wealth and risk effects of the Dodd-Frank Act on U.S. financial institutions. We measure the effects of key legislative events of the Act by means of a multivariate regression model using the seemingly unrelated regression (SUR) framework. Our results indicate a mixed reaction by financial institutions during the various stages of the Act’s legislative process. Further tests reveal that any positive reactions are driven by small and/or low risk institutions, while negative ones are consistent across subsets; except for investment banks. We also find market risk increases for most financial institutions that are dominated by small and/or low risk firms. The cross-section results reveal that large institutions fare better than their smaller counterparts and that large investment banks gain value at the expense of others. Overall, the Dodd-Frank Act may have redistributed value among financial institutions, while not necessarily reducing the industry’s riskiness.     

Financial literacy and consumer credit portfolios

We use survey data from a sample of UK households to analyse the relationship between financial literacy and consumer credit portfolios. We show that individuals who borrow on consumer credit exhibit worse financial literacy than those who do not. Borrowers with poor financial literacy hold higher shares of high cost credit (such as home collected credit, mail order catalogue debt and payday loans) than those with higher literacy. We also show that individuals with poor financial literacy are more likely to lack confidence when interpreting credit terms, and to exhibit confusion over financial concepts. They are also less likely to engage in behaviour which might help them to improve their awareness of the credit market.     

Don't They Care? Or,Are They Just Unaware? Risk Perception and the Demand for Long‐Term Care Insurance

The potential need for long‐term care (LTC) is one of the greatest financial risks faced not only by the elderly but also by their adult children, who often provide care or financial assistance. We investigate adult children's role in the demand for LTC insurance. Similar to flood insurance, we find that demand for LTC insurance is low due to low risk perception. The more aware adult children are of the risk, the more likely LTC insurance is to be purchased, either by the children themselves on behalf of their parents or by the parents under the influence of their children.     

Extending financial literacy to insurance literacy: a survey approach

We extend behavioural research in investment and retirement savings to insurance, by investigating factors that may influence individuals’ insurance decision making. These factors include financial literacy, specialist insurance education and some behavioural biases. Based on a definition of insurance literacy that requires both having, and applying insurance knowledge, we find from a survey of postgraduate students that financial literacy does not necessarily translate to insurance literacy, whereas more specialised education can improve insurance literacy. Results also indicate specialist education potentially reduces susceptibility to anchoring effects.     

Financial literacy and stock market participation

We have devised two special modules for De Nederlandsche Bank (DNB) Household Survey to measure financial literacy and study its relationship to stock market participation. We find that the majority of respondents display basic financial knowledge and have some grasp of concepts such as interest compounding, inflation, and the time value of money. However, very few go beyond these basic concepts; many respondents do not know the difference between bonds and stocks, the relationship between bond prices and interest rates, and the basics of risk diversification. Most importantly, we find that financial literacy affects financial decision-making: Those with low literacy are much less likely to invest in stocks.     

Risk Shifts Following Sarbanes‐Oxley: Influences of Disclosure and Governance

The Sarbanes‐Oxley Act of 2002 (SOX) aimed to improve financial reporting by enhancing corporate disclosure and governance. We find statistically significant increases, from before to after the passage of SOX, in total return variance, market risk and idiosyncratic risk. The risk increases are consistent with predictions that the legislation would cause firms to disclose more negative information, resulting in increased investment risk. However, in cross‐sectional tests, post‐SOX improvements in information certainty, board independence and monitoring are associated with smaller increases or greater decreases in risk. If SOX is responsible for these improvements, its effects are consistent with its purpose.     

The impact of undergraduate personal finance education on individual financial literacy,attitudes and intentions

Financial literacy education features prominently among the policy options available to improve personal financial decision‐making. Notwithstanding calls to expand delivery of financial literacy units at university level, such offerings are relatively rare with little evaluation. We provide an evaluation of the impact on financial literacy, financial attitudes and financial behaviour intentions of a semester unit in personal finance delivered to undergraduates at an Australian university, carefully controlling for confounding effects in the analysis. We report increases in objective and subjective financial literacy and an additional gender effect. Contrary to previous speculation, we do not find overconfidence as an associated outcome.     

Stock price crash risk and internal control weakness: presence vs. disclosure effect

This study examines the stock price crash risk for a sample of firms that disclosed internal control weaknesses (ICW) under Section 404 of the Sarbanes‐Oxley Act (SOX). We find that in the year prior to the initial disclosures, ICW firms are more crash‐prone than firms with effective internal controls. This positive relation is more pronounced when weakness problems are associated with a firm's financial reporting process. More importantly, we find that stock price crash risk reduces significantly after the disclosures of ICWs, despite the disclosure itself signalling bad news. The above results hold after controlling for various firm‐specific determinants of crash risk and ICWs. Using an ICW disclosure as a natural experiment, our study attempts to isolate the presence effect of undisclosed ICWs from the initial disclosure effect of internal control weakness on stock price crash risk. In so doing, we provide more direct evidence on the causal relation between the quality of financial reporting and stock price crash risk.     

Financial literacy,financial development,and leverage of small firms

This study examines the relationship between financial literacy and the leverage of small firms, specifically of the legal forms, sole proprietorships, and partnerships. Using a cross-section of 73,302 firms in 22 countries, we find that the leverage of small firms is negatively associated with financial literacy. Further, we explore the role of financial development, bankruptcy and transaction costs, and information asymmetry, in moderating the relationship. We find that the negative relationship is less pronounced in countries with lower financial development, high bankruptcy and transaction costs, and high information asymmetry environments, respectively. We contribute to the understanding of small firms' leverage and the literature on financial literacy, SMEs, finance, and entrepreneurship. This study offers policy implications for economies that promote SMEs for entrepreneurship training and development.     

Genetic Variation in Financial Decision‐Making

Individuals differ in how they construct their investment portfolios, yet empirical models of portfolio risk typically account only for a small portion of the cross‐sectional variance. This paper asks whether genetic variation can explain some of these individual differences. Following a major pension reform Swedish adults had to form a portfolio from a large menu of funds. We match data on these investment decisions with the Swedish Twin Registry and find that approximately 25% of individual variation in portfolio risk is due to genetic variation. We also find that these results extend to several other aspects of financial decision‐making.     

Uninvited U.S. Investors? Economic Consequences of Involuntary Cross‐Listings

We study the economic consequences of a recent Securities and Exchange Commission securities regulation change that grants foreign firms trading on the U.S. over‐the‐counter (OTC) market an automatic exemption from the reporting requirements of the 1934 Securities Act. We document that the number of voluntary (sponsored) OTC cross‐listings did not increase following the regulation change, suggesting that it did not achieve its intended purpose of increasing voluntary OTC cross‐listings through a reduction in compliance costs. We do find that the design of the regulation allowed financial intermediaries to create an unprecedented number of involuntary (unsponsored) OTC ADRs: 1,700 unsponsored ADR programs for 920 firms were created for companies that had previously chosen not to cross‐list in the United States. Our difference‐in‐differences analysis based on a matched sample approach documents that foreign firms forced into the U.S. capital markets experience a significant decrease in firm value, and we further show that the decrease in firm value is related to an increase in U.S. litigation risk. We also find that depositary banks’ propensity to involuntarily cross‐list firms is positively related to banks’ expected fee revenue, and that banks chose firms that incur high costs when involuntarily cross‐listed. Our results provide evidence that securities regulation can be exploited for private gain and result in costly unintended consequences.     

Financial literacy and the demand for financial advice

The low level of financial literacy across households suggests that they are at risk of making suboptimal financial decisions. In this paper, we analyze the effect of investors’ financial literacy on their decision to demand professional, non-independent advice. We find that non-independent advisors are not sufficient to alleviate the problem of low financial literacy. The investors with a low level of financial literacy are less likely to consult an advisor, but they delegate their portfolio choice more often or do not invest in risky assets at all. We explain this evidence with a highly stylized model of strategic interaction between investors and better informed advisors with conflicts of interests. The advisors provide more information to knowledgeable investors, who anticipating this are more likely to consult them.     

Auditor Independence,Non‐Audit Services,and Restatements: Was the U.S. Government Right?*

Do fees for non‐audit services compromise auditor's independence and result in reduced quality of financial reporting? The Sarbanes‐Oxley Act of 2002 presumes that some fees do and bans these services for audit clients. Also, some registrants voluntarily restrict their audit firms from providing legally permitted non‐audit services. Assuming that restatements of previously issued financial statements reflect low‐quality financial reporting, we investigate detailed fees for restating registrants for 1995 to 2000 and for similar nonrestating registrants. We do not find a statistically significant positive association between fees for either financial information systems design and implementation or internal audit services and restatements, but we do find some such association for unspecified non‐audit services and restatements. We find a significant negative association between tax services fees and restatements, consistent with net benefits from acquiring tax services from a registrant's audit firm. The significant associations are driven primarily by larger registrants.     

金融素养与家庭储蓄率——基于理财规划与借贷约束的解释

金融科技的发展使得人们参与金融市场的门槛与成本迅速降低,金融产品也不断丰富,金融市场参与者的异质性增加,金融素养对家庭金融决策的影响越来越明显。本文研究发现:(1)家庭在安排储蓄与消费时,金融素养有显著影响,金融素养与家庭储蓄率呈倒U型关系。(2)理财规划和借贷约束是影响家庭储蓄率上升的两个渠道。(3)金融素养由低逐渐升高时,家庭的理财规划意识增强,通过提高储蓄率来保障资金充足。当金融素养增加到一定程度,理财规划意识优化资产配置的作用增强,抑制消费的作用减弱,同时借贷约束缓解会帮助家庭增加消费。本文的发现有助于厘清家庭储蓄率差异的成因,对提升居民福利,增强金融教育政策的针对性,有积极意义。