Academic journal article Financial Services Review

What Factors Affect the Household Net Worth of Employees and Business Owners?

Academic journal article Financial Services Review

What Factors Affect the Household Net Worth of Employees and Business Owners?

Article excerpt

Abstract

Why do some households accumulate a prodigious amount of wealth while others have barely enough to meet their needs? This study investigates the effects of financial attitudes, financial behavior, employment, and socioeconomic factors on the household net worth of employees and business owners. Regression analysis using the 1998 Survey of Consumer Finances shows that household income has the largest impact on employees' net worth. The ownership of a large business and household income have the largest impact on business owners' net worth. Being frugal also influences business owner's net worth.

© 2003 Academy of Financial Services. All rights reserved.

JEL classification: D19; E21

Keywords: Business owner; Employee; Net worth; Survey of consumer finances

1. Introduction

Net worth is often used as an indicator of the economic status of a household. When households have negative or only a little net worth, it is assumed that they are financially vulnerable to difficulties such as layoff, illnesses, and other emergencies. In contrast, some households who have accumulated considerable net worth often continue to save. Why do some households accumulate a prodigious amount of wealth while others have barely enough to meet their needs?

Warneryd (1999) argues that psychological and behavioral factors provide insight to economic phenomena that cannot be interpreted solely on the basis of economic and demographic factors. Previous studies based on aggregate level data do not appear to sufficiently explore the attitudinal and behavioral factors that might be related to the accumulation and level of household net worth. Moreover, Sullivan, Warren and Westbrook (2000) in a study of personal bankruptcy, found that job-related income interruption was the most frequently cited reason for personal bankruptcy filing. Yet little research has examined the effect of employment on household net worth. Because most households generate income through employment, job-related factors undoubtedly play an important role in net-worth accumulation.

Furthermore, among working households, business owners and employees differ in terms of their employment characteristics, financial attitude, and financial behavior (Becker, 1993; Bregger, 1996; Silvestri, 1999; Stanley & Danko, 1997). Therefore, it is important to study the factors affecting the level of net worth separately for business owners and employees. The purpose of this research is to identify and examine the factors that influence the level of net worth of employees and business owners.

2. Review of literature

2.1. The effect of financial attitude on household net worth

Warneryd (1999) proposes that psychological factors might explain the variance in an economic model that is not explained by demographic and economic variables. This suggests that psychological factors such as attitude toward the use of credit and risk tolerance will influence the level of net worth and that they should be examined. Although Godwin (1997) found that individuals developed a more negative attitude toward credit over time, the overall trend has been an increased amount of credit debt and household debt as a fraction of disposable personal income since the 1980's (Canner, Kennickell & Luckett, 1995). Kim and DeVaney (2001) found that credit card revolvers with a positive attitude toward credit had higher outstanding balances than revolvers with a negative attitude toward credit use. It is hypothesized that those who are more approving of the use of credit will have less net worth. The same effect is expected for both employees and business owners.

An individual's risk tolerance is likely to influence the ability to achieve one's investment goals (Grable & Lytton, 1998; Trone, Allbright & Taylor, 1996). Those who are more risk tolerant tend to include more high-risk/high-return investments in their household portfolio. …

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