Stock Market Participation and the Internet

Theory indicates that frictions (e.g., information and transaction costs) could account for the lower than expected stock market participation rates. This paper examines the hypothesis that there has been a fundamental change in participation and links this change to the reduction of these frictions by the advent of the Internet. Using panel data on household participation rates over the past decade, the results show computer/Internet using households raised participation substantially more than non-computer using households. The increased probability of participation was equivalent to having over $27,000 in additional household income or over 2.5 more mean years of education. (JEL: D14, G10) ∗Department of Applied Economics and Management, Cornell University, 454 Warren Hall, Ithaca, NY 14853. Phone: 607-254-7219. E-mail: [email protected]. Many thanks to Ignacio Palacios-Huerta, David Weil, Herakles Polemarchakis, and Sean Campbell for their guidance, advice, and insight. I would also like to thank Moshe Buchinsky, William Darity, Jr., Andrew Foster, Rachel Friedberg, Jay Ritter, and seminar participants at Brown University, Columbia University, Cornell University, UNC-Chapel Hill, and University of Florida for their helpful comments and discussions. All errors are my own. c © 2006. All rights reserved. Work in progress.