Credit Scores, Social Capital, and Stock Market Participation

Bricker, Jesse; Li, Geng

doi:10.17016/FEDS.2017.008

Working Paper

Credit Scores, Social Capital, and Stock Market Participation

Abstract: While a rapidly growing body of research underscores the influence of social capital on financial decisions and economic developments, objective data-based measurements of social capital are lacking. We introduce average credit scores as an indicator of a community's social capital and present evidence that this measure is consistent with, but richer and more robust than, those used in the existing literature, such as electoral participation, blood donations, and survey-based measures. Merging unique proprietary credit score data with two nationwide representative household surveys, we show that households residing in communities with higher social capital are more likely to invest in stocks, even after controlling for a rich set of socioeconomic, preferential, neighborhood, and demographic characteristics. Notably, such a relationship is robustly observed only when social capital is measured using community average credit scores. Consistent with the notion that social capital and trust promote stock investment, we find the following: first, the association between average credit score and stock ownership is more pronounced among the lower educated; second, social capital levels of the county where one grew up appear to have a lasting influence on future stock investment; and third, investors who did not own stocks before have a greater chance of entering the stock market a few years after they relocate to higher-score communities.

Keywords: Credit scores; Social Capital; Stock market participation; Trust;

JEL Classification: D14; G10; O16;

https://doi.org/10.17016/FEDS.2017.008