Racial/ethnic Disparities in Stock Ownership: A Decomposition Analysis

Beginning of article

There is a large disparity in stock ownership between racial/ethnic groups in the United States. A logistic regression model shows that there are significant differences between these groups even after controlling for net worth, income, risk tolerance levels and other factors. This study presents the first application of the Oaxaca (1973) decomposition technique to racial/ethnic differences in stock ownership, and provides estimates of the relative importance of these factors in accounting for the gaps. Differences in net worth, income, risk tolerance, education, and homeownership account for almost all of the disparity in stock ownership between Black and White households and a substantial portion of the disparity between Hispanics and White households.

Introduction

A number of studies examine household disparities in wealth distribution among different racial/ethnic groups in U.S., with most studies examining the gap between Blacks and Whites (Altonji, Doraszelski, & Segal, 2000; Barsky, Bound, Kervin, & Lupton, 2002; Blau & Graham, 1990; Smith, 1995; Choudhury, 2002; Wolff, 1998). Investment in stocks is an important factor in future economic well-being of households, especially in terms of potential retirement adequacy. White households have much higher stock ownership rates than minority groups, even after controlling for income and other factors (Zhong & Xiao, 1995; Schooley & Worden, 1996; Wang & Hanna, 2006). Using the 1992 Health and Retirement Survey, Choudhury (2002) demonstrates that Whites, Blacks and Hispanics are different in saving behavior, and minority households are notably less inclined to invest in riskier, higher-yielding financial assets.

Although there is rich literature documenting the gap between White households and Black and Hispanic households in terms of holding stocks, little is known about the relative contribution of income, household characteristics, risk tolerance, or discrimination in provision of financial services and information to racial/ethnic gaps. Using Oaxaca's (1973) technique, the most popular method for decomposing the mean difference between groups, as well as its extension by Fairlie (2005), this is the first study to estimate the relative contribution of different factors to the racial/ethnic gaps between Blacks and Whites and between Hispanics and Whites in stock ownership.

Literature Review

Overview

A household's investment allocation is crucial for its wealth accumulation, especially for retirement adequacy. However, households with similar demographic and financial resources behave quite differently in the allocation of investment portfolios. For financial investments for long-term goals, the relationship between risk and return means that portfolio allocation in risky assets makes a substantial difference in projected wealth accumulation. In the sections below, some important literature relevant to the racial/ethnic differences in terms of stock and other risky asset holdings and wealth accumulation is summarized, and then literature related to factors affecting the choice of holding stocks is discussed.

Investment behavior can be influenced by preferences. Ogden, Ogden and Schau (2004) suggest that a person's race or ethnicity may be related to a subculture, which might impact preferences. One important preference related to investment behavior is risk tolerance. Harihan, Chapman and Domian (2000) note that modern portfolio theory predicts that a household's allocation of investments to risky assets is affected by its risk tolerance, and provide empirical evidence of the relationship. Schooley and Worden (1996) also find a relationship between risk tolerance and risky asset allocation.

Most studies find that Blacks and Hispanics are less willing to take investment risk than Whites, as Yao, Gutter, and Hanna (2005) note in their review of empirical studies. Yao, et al. (2005) analyze a combination of the 1983 to 2001 Survey of Consumer Finances (SCF) datasets, and report that Blacks and Hispanics are less willing to take some investment risk than otherwise similar White households, although more willing to take substantial investment risk than Whites.

Coleman (2003) analyzes the 1998 SCF models to compare the risk tolerance levels of Whites, Blacks, and Hispanics. In a logistic regression controlling for racial/ethnic group, gender, marital status, education, age, and family size, she finds that Blacks and Hispanics are less likely to be willing to take any risk compared to otherwise similar Whites. However, when she also controls for net worth, the predicted risk tolerance difference between Blacks and Whites is not significant.

Gutter and Fontes (2006) find that risky asset ownership is the key to racial differences in portfolio choices, as Black and Hispanic households that own any risky asset are not significantly different from similar White households in risky asset proportions. Coleman (2003) finds that Blacks and Hispanics have a significantly lower risky asset proportion than otherwise similar Whites when net worth is not controlled, but when net worth controlled, the predicted difference between Blacks and Whites is not significant. Wang and Hanna (2006) find that households with Black or Hispanic respondents are significantly less likely to hold stocks directly and/or indirectly than are otherwise similar households with White respondents.

Despite the preponderance of studies finding that Blacks and Hispanics are less willing to take investment risk than Whites, it seems possible that minority groups may be less risk tolerant because of limited familiarity with financial investments, rather than because of a lower level of true risk tolerance. Barsky, Juster, Kimball, and Shapiro (1997), using an income gamble measure on the Health and Retirement Study (HRS) dataset, report that Blacks and Hispanics have average risk tolerance levels higher than Whites. The Barsky et al. (1997) risk tolerance measure is designed to be a pure measure of risk tolerance and is unrelated to financial investments, so it might be closer to the economic concept of risk tolerance than the SCF measure.

A consumer's access to information and related services in financial markets might also affect its financial behavior. If consumers can obtain more information and service for financial investment, they probably will be more willing to participate in financial markets. For example, more educated households may be more willing to participate in financial market than less educated people. Haurin and Morrow-Jones (2007) conclude that differences in knowledge of markets might contribute to lower homeownership rates of Black households, so it is plausible that similar factors may contribute to lower stock ownership rates.

Wealth, Investment and Race

The wealth gap between non-Hispanic White households and households with respondents in other racial/ethnic groups narrowed between 1995 and 2001(Aizcorbe, Kennickell, & Moore, 2003; Bucks, Kennickell, Starr-McCluer, & Sunden, 1997; Kennickell, Starr-McCluer, & Surette, 2000), but then became much wider in 2004 (Kennickell, & Moore, 2006).

Smith (1995) compares the racial and ethnic differences in wealth through 1992 HRS and concludes that income is an important reason for racial and ethnic deficits, but that income-conditioned wealth disparities in asset remain large. Differences in stock ownership may contribute to the wealth differences. Previous researchers all find a racial wealth gap, using a variety of data sets, but have inconsistent results about the influence of various demographic and financial characteristics on the gap. Altonji, et al. (2000) use a decomposition method and find that most or all of the race gap in the wealth level for single men and single women and a substantial portion of the gap for married couples would disappear if Blacks and Whites have the same distribution of income and demographic variables and if the slope coefficients of the White wealth equation hold for Blacks. For instance, they find that single Black men would have 108% of the wealth of single White men if they have the same income and demographics as White men when using the estimated coefficients of the wealth model for Whites. Kaufman (1983) uses a structural decomposition of Black-White earning differentials based on a regression standardization approach and concludes that eliminating all Black-White differences within labor market divisions would still leave a significant earnings gap between Blacks and Whites due to the structure of the labor market. Blau and Graham (1990), using data from the 1976 and 1978 National Longitudinal Surveys of young men and young women (NLSY) to examine the Black-White differences in wealth and asset composition among younger families, find that as much as 75% of racial differences remain unexplained by income and other demographic and locational characteristics. Barsky et al. (2002) use a non-parametric approach to analyze racial differences in earnings and compares the result with the traditional decomposition method. After re-weighting observations to give a sample of Whites a similar earnings distribution as that for Blacks, they find that differences in characteristics explain only 64% of the wealth gap by using a nonparametric approach, compared with 97% when the standard (linear) regression decomposition approach is used (with White coefficients).

Given the importance of investments in the risky assets in contributing to wealth differences between different racial/ethnic groups, many studies focus on the ownership of risky assets and its relationship with race (Haliassos & Bertaut, 1995; Plath & Stevenson, 2000; Coleman, 2003). For instance, using the 1992 HRS, Choudhury (2002) demonstrates that Whites, Blacks and Hispanics are different in saving behavior, and minority households are notably less inclined to invest in riskier, higher-yielding financial assets. Gutter, Fox and Montalto (1999) analyze Black/ White racial difference in the likelihood of owing risky assets and conclude that differences in risky asset ownership between Black households and White households are due to racial characteristics in the individual determinants of risky asset ownership. Stevenson and Plath (2006) compare financial service consumption patterns of Hispanics with those of non-Hispanic whites, using the 1998 SCF, and find that Hispanics differ markedly from their non-Hispanic White counterparts in terms of financial product preferences and investment asset portfolio composition. Further, Hispanics trail their non-Hispanic White counterparts in terms of breath and depth of financial holdings, particularly in the area of more risky but historically higher …