Racial/ethnic Disparities in Stock Ownership: A Decomposition Analysis
Wang, Cong, Hanna, Sherman D., Consumer Interests Annual
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.
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.
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. …