“Rookies to the stock market: A portrait of new shareholders”

Research in International Business and Finance 38 (2016) 565–576

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Research in International Business and Finance journal homepage: www.elsevier.com/locate/ribaf

Full length article

“Rookies to the stock market: A portrait of new shareholders” Martin Abrahamson Uppsala University, Department of Business Studies, Sweden

a r t i c l e

i n f o

Article history: Received 19 April 2016 Accepted 8 July 2016 Available online 16 July 2016 Keywords: Individual investor Stock market Stock portfolio Rookie Behavioral finance

a b s t r a c t This study examines individuals entering the stock market, “rookies.” The study uses unique ownership data, containing investor holdings of all listed Swedish firms over the sample period from 2004 to 2010, to examine rookies’ stock portfolios. In addition, this study explores investor sophistication among rookies, based on individual characteristics and portfolio composition. Although the average shareholder is aging and leaving the stock market, this study shows there are signs of rejuvenation, with rookies entering the stock market. The results show that the majority of rookies hold under-diversified stock portfolios and choose one large firm as their first stock market investment. Rookie characteristics display gender differences, in which the average female rookie has lower income, is older, but holds a larger stock portfolio than her male counterpart. © 2016 Elsevier B.V. All rights reserved.

1. Introduction For decades the numbers of individual stock market investors have been declining. Davis (2009) reports that in the U.S., individual investors are dying. In order for individual stock market investors not to be eradicated over time, and to mitigate the ailing trend, rejuvenation is needed. This study analyses the development of individual stock market investors, and possible rejuvenation, with focus on new stock investors (henceforth rookies). The study aims to show the existence of rookies, as well as to fill in a piece of the puzzle of who the rookies are. Individual investors, in general, are considered less sophisticated, with bias limiting their success in trading, compared with institutions. Prior studies focus on the trading behavior of individual investors (e.g., Barber and Odean 2000, 2001; Goetzmann and Kumar 2008), but knowledge on rejuvenation among individual stock market investors is limited. Rather, several studies show that the numbers of individual investors are declining and might have a diminishing future on the stock market (e.g., Lease et al., 1974; Davis 2009; Rydqvist et al., 2014). The present study analyses whether the decline in the numbers of shareholders is an isolated U.S. problem or if a similar pattern can be detected in Sweden too. Furthermore, no previous study has shown whether the decline in numbers of shareholders is due to the non-existence of rookies or if the stock market attracts rookies but nonetheless has a declining trend. Even though the results presented in this study support the declining trend of stockholdings directly owned by individual investors, there is evidence of rookies moving into the stock market. Thus, this study shows that the reason for the ailing trend is not because there are no new shareholders investing in the stock market, but rather that the decline is mitigated by rookies. Furthermore, this study reveals characteristics and stock portfolio preferences of rookies. Previous studies portraying individual investors have been undertaken on a small scale. For example, De Bondt (1998) presents a portrait based on 45 investors and Durand et al. (2008) study 18 investors. In contrast,

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the present study is based on a dataset containing all individual shareholders in Swedish listed firms (approximately 1.9 million stock market investors). De Bondt (1998) argues for two main reasons for studying individuals’ actions in the stock market rather than their beliefs. First, investment by the individual affects well-being. Second, with individuals assuming ever-larger responsibility for their own pensions, the future well-being of retirees is affected. In Sweden, the responsibility for pension savings has shifted, from the government, towards the individual in recent decades. Holding shares is common in Sweden. According to Guiso et al. (2003), 50 percent of households in Sweden own shares, which is a similar proportion to the U.S. Barber et al. (2009) show that individual investors’ trading is driven by active own decisions and not as a reaction to institutional trading. Together, this supports the study of individual stock market entrants separately to institutions. This study focuses on rookies, their directly owned shares, and their entry to the stock market. The study explicitly targets rookies and their stock market portfolios when entering the stock market. Thereby, this study focus on a previously overlooked group of investors, the rookies. Although previous research question the future of individual stock market investors, no previous study addresses rookies. The results of this study support previous research, showing a decline in the number of individual investors holding shares. However, this study also shows that rookies are entering the stock market, with possibilities of rejuvenation among stock market investors. Furthermore, this study portrays rookies and their first stock portfolios, which contributes to previous portraits of individual investors (e.g., De Bondt, 1998; Durand et al., 2008). The study supports previous research reporting under-diversification among individual shareholders, with most stock portfolios consisting of stocks from only one or a few firms. In addition the study reveals gender differences: female rookies enter the stock market later in life but with larger proportions of their income, and hold slightly larger numbers of stocks in their portfolios compared to male rookies. To the best of our knowledge, there are no previous studies on stock market rookies. The remainder of the paper proceeds as follows. The following Section 2 describes this study in relation to prior studies. Section 3 describes the data and methodology. Section 4 presents the results, and Section 5 concludes. 2. Literature review Lease et al. (1974) show that individuals have been net sellers of shares in the U.S. from 1959. Schlarbaum et al. (1978) extend the timeframe to 1978, with the same pattern of individuals being net sellers. Furthermore, Rydqvist et al. (2014) show that ever since World War 2, there has been a shift from direct shareholdings by individuals to holdings through institutions. Rydqvist et al. (2014) present the development for the U.S. and show that individuals who directly held shares declined from 90 percent to one third of the stock market. Together, the studies show that, at least in the U.S., individual investors are declining with no rejuvenation or recovery in sight; despite this, there is a lack of studies on rookies. Considering the gender of investors, Lease et al. (1974) find that 80–90 percent of investment decision makers are men. A similar gender balance can be drawn from Cohn et al. (1975) and Tekc¸e et al. (2016). Barber and Odean (2001) show that individuals typically expect their stock portfolios to outperform the market. Although male investors have the highest expectations, both male and female investors expect to outperform the market. Odean (1998) describes traders as overconfident, and therefore, carrying dead weight losses, since they trade too frequently and overreact to irrelevant information. In addition, Tekc¸e and Yilmaz (2015) study investor overconfidence in Turkey, and their results support those of Odean (1998) with males, young, low-income, and low-education investors being the most overconfident. Furthermore, Tekc¸e and Yilmaz (2015) state that overconfidence has negative effects on portfolio wealth. Barber and Odean (2001) show that men overtrade more than women do, and thereby lose more money due to transaction costs. Barber and Odean (2000) also show that individual investors underperform against relevant benchmarks. In their dataset, Barber and Odean (2000, 2001), proxy the gender of the investor by identifying the name of the person who opened the household’s account. However, in this study, the individual characteristics of the shareholders are used, and this gives the opportunity to ask other questions, considering the age, income and gender of the shareholder, rather than anyone within a household. Hoffmann et al. (2013) study individual investors and their behavior during the financial crisis of 2008–2009. The authors report that individual investors continue to trade, seeing the falling market as an opportunity to buy cheap stocks rather than investing in other products. Burnie and De Ridder (2009) use the same source of ownership data as in the present study. However, Burnie and De Ridder (2009) focus on the institutional ownership structure in Sweden over 2000 to 2002. Their study provides some support for the displacement of individual shareholders in favor of institutions. The results of Burnie and De Ridder (2009) and Rydqvist et al. (2014) together suggest that the pattern in Sweden is similar to that of the U.S., with individual shareholders diminishing in favor of institutions. Individual investors are described as under-diversified (e.g., Blume and Fried 1975; Kelly, 1995; Mitton and Vorkink, 2007; Goetzmann and Kumar, 2008). Considering the 30-plus stocks as a cut-off for diversified stock portfolios (Statman, 1987), most individuals are severely under-diversified. In fact, only 0.04 percent (98 of 243,866 individuals, not reported) of the rookies hold 30 stocks or more in Sweden. Goetzmann and Kumar (2008) find evidence for investors diversifying deliberately, when holding more than one stock. They report that investors pick passive diversification when holding more than one stock. Studies of investors in the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden) have an advantage over U.S. studies regarding data availability because the former have identification numbers for every citizen (equivalent to social security numbers) and openness of government authorities, which enable researchers to access information and decode personal information. Utilizing Swedish data, Massa and Simonov (2006) show that investors earn strong returns

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on holdings closely related to themselves, either geographically or professionally. Massa and Simonov (2006) use a dataset with a sample (3 percent) of the Swedish population, the Longitudinal Individual Data for Sweden (LINDA), to describe income and holdings other than shares. By comparison, the present study uses data on the government-reported income statement and ultimate stock holdings of all shareholders in Sweden. Massa and Simonov (2006) show differences between high- and low-wealth investors, with high-wealth investors being more diversified, which supports the correlation between investor sophistication and wealth. Calvet et al. (2007) state that the probability of a Swedish household holding shares is dependent on the sophistication of the household, where households with low education and wealth are less likely to invest in shares. In addition, the authors report that sophisticated Swedish households are exposed to larger losses than less sophisticated households due to under-diversification. That might partly be explained by the study’s results that less sophisticated households rather invest in stock mutual funds. Calvet et al. (2009) report that sophistication is positively related to household wealth. While these studies focus on households instead of individuals, this study uses individuals’ stockholdings; thus, the level of detail is higher and the results are linked to a unique individual. Grinblatt and Keloharju (2001) study why investors trade, based on Finnish data. Among other things, they find a gender effect difference in trading patterns between men and women, supporting previous studies (e.g. Barber and Odean, 2001). However, the differences are not as large for selling shares as for buying shares, explained by men being more active traders. Grinblatt and Keloharju (2001) find that larger portfolios are positively correlated with active trading behavior, and that the propensity to buy stocks is larger for men than for women. This study uses similar ownership data, but for Swedish investors. Kaustia and Knüpfer (2012) study Finnish stock market entry likelihood on an aggregate level based on zip codes, where they find evidence of entry rates based on neighborhood trading. Andersson (2013) study trading behavior of individuals based on data from a Swedish brokerage house. He reports excessive trading among investors with lower income, wealth, age and education, and his results show traders have weaker returns due to trading losses and transaction costs. Recently, Andersson et al. (2015) present a study of risk taking based on 149 Swedish investors. In addition, Peterson et al. (2015) study a small Swedish sample to assess the trust in and reliance on professional stock investors by non-professionals. Andersson et al. (2012) study evaluation interval effects based on Swedish students in an experimental setting. In summary, previous studies of individual investors are mainly based on small experiments, surveys or brokerage house data. Individuals are seen as less sophisticated shareholders than institutions, yet still, there are differences among individuals. Previously, individual investor characteristics, such as experience, diversification, age, income and gender, have been reported to explain variation in individual stock market behavior. However, whether investor characteristics can be used to explain portfolio value and composition among rookies has not been tested up to now. This study uses regression models to explain portfolio value based on the income, age, gender, diversification, and share price level. Based on prior studies, income, diversification, age, and share price level are expected to indicate sophistication and higher portfolio value. 3. Data and methodology Achieving generalizable results from large data sources and identifying the owner of the stock are essential questions that have been troublesome in previous studies of individual investors. One way of dealing with this issue is to conduct surveys among known households (e.g. Lease et al., 1974; De Bondt, 1998; Lee et al., 2015). However, a survey study has several limitations, such as dealing with issues of non-respondents and selection bias. Statistics Sweden and the Swedish Financial Supervisory Authority report that Swedish households owned 13–16 percent of all shares in publicly listed Swedish firms during 2004–2010. Statistics Sweden report holdings by individuals, where the number of shares in the firm exceeds 500 shares. However, in this study all individual holdings are included, regardless of the number of shares in each firm. In the present study, individual investors are defined as shareholders, with identification numbers, who hold the stock in their own names, and not through for example a stock mutual fund. This study uses a sample of individual investors, based on a dataset reflecting ultimate stockholdings in Swedish listed firms. The same source of ownership data is used in Abrahamson and De Ridder (2015). The analyses use annual data from 2004 to 2010, obtained from the Central Securities Depositary in Sweden, Euroclear Sweden. Specifically the stock portfolio composition of each shareholder is obtained at the end of each calendar year over the sample period. Stock prices are obtained from the Stockholm Stock Exchange (SSE). The portfolio value is compiled at the year-end, with the closing price and holdings on the last day of trade used to set the value of the share. The values of all holdings are compiled in the portfolio value for each investor. Information on the investment firms traded on the SSE is hand-collected and used in the one-stock portfolio analyses. In Sweden, every citizen has a unique identification number, which reveals the birth date and gender of the individual. In this study, the identification number of each investor enables a detailed examination of stock market holdings in publicly listed Swedish firms after controlling for age and gender. Furthermore, for all individuals in the sample, the ownership data are combined with annual1 employment income obtained from the Swedish Tax Agency, Skatteverket. The income for 56 individuals was replaced with zero because they reported non-positive income. Throughout the paper income and portfolio

1 The annual frequency of the data for this study disables analysis of the activity around the turn of the year, as previously studied (by e.g. Ritter (1988)). Nor reveal the trading activity, although it has the advantages regarding investor characteristics and precision of the actual holdings, whereas previous research has been limited in these aspects.

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Table 1 Summary Statistics. Panel A: Rookies in Sweden

Proportion

Year

Number of Rookies

Age Mean

Median

Men

Women

2004 2005 2006 2007 2008 2009 2010 Average

29,887 27,344 31,699 37,092 38,880 38,957 24,835 32, 671

36 37 37 37 38 38 37 37

37 38 37 35 37 37 35

0.54 0.53 0.55 0.58 0.60 0.61 0.59 0.57

0.46 0.47 0.45 0.42 0.40 0.39 0.41 0.43

Panel B: Sample Distribution, Rookies in Sweden Variable

Mean

Std.dev.

25%

Median

75%

Portfolio Value Income Age Number of Stocks

47,171 214,825 37 2.1

117,521 187,080 21 2.5

3382 24,511 23 1

10,761 215,147 36 1

33,398 325,614 53 2

Panel C: All Individual Investors in Sweden

Proportion

Year

Number of Shareholders

Age Mean

Median

Men

Women

2004 2005 2006 2007 2008 2009 2010 Average

1,784,382 1,723,697 1,676,986 1,630,540 1,622,092 1,608,252 1,550,575 1,656,646

53 53 54 54 54 55 55 54

54 55 55 56 56 57 57

0.59 0.58 0.58 0.58 0.58 0.58 0.58 0.58

0.41 0.42 0.42 0.42 0.42 0.42 0.42 0.42

Panel D: Distribution of all Individual Investors in Sweden (non-rookies) Variable

Mean

Std.dev.

25%

Median

75%

Portfolio Value Income Age Number of Stocks

145,387 264,666 53 3.1

394,563 201,047 19.4 4.3

6320 134,195 39 1

21,546 244,331 54 2

88,924 351,925 66 3

Notes: This table presents summary statistics for new individual investors (“rookies”) with a long position in a stock listed on the Stockholm Stock Exchange in Sweden over 2004–2010. Panel A reports the number of rookies sorted by age and gender for each calendar year. Panel B reports the distribution of portfolio value, income, age, and number of stocks. Portfolio value is defined as the total value of the portfolio for each investor, calculated at the end of December each calendar year. Data on stock ownership are obtained from the Central Security Depository in Sweden (Euroclear Sweden). Income is the annual employment income for each investor and data are obtained from the Swedish Tax Agency (Skatteverket). Age is the age of the investor. Number of stocks is the number of different stocks (i.e., firms) in the portfolio. Panels C and D report the same information as panels A and B, but for all (non-rookie) individual investors in Sweden. For panels B and D, income and portfolio value are winsorized at 1%-level, presented in SEK, Swedish Krona) and expressed in the price level of year 2010 (using consumer price index from Statistics Sweden to adjust for inflation).

value are presented in the local currency, Swedish krona (SEK).2 To mitigate the impact of outliers the portfolio value and income are winsorized at the 1 percent level in the analyses (Tables 2–7). 3.1. Rookies Guo et al. (2007) state that all individual investors are rookies, at least those on the Chinese stock market. However, in this study rookies are defined as individual investors entering the stock market, with no previous stock holdings over at least the last 5 years. The rookie sample was extracted out of the total population of 2 million (1,942,523) shareholders, eliminating all individuals holding any stock during the years 1999–2003. Individuals holding a stock after 2003 who had not held a stock prior are defined as rookies. For the sample years after 2004, the eliminating timeframe is extended to include the former year. Finally, the yearly subsamples are compiled into one sample of all rookies for the whole sample period, 2004–2010. Shareholders selling all shares and later re-investing in the stock market during the sample period are not considered rookies. The sample of rookie shareholders consists of 241,893 investors. Due to data limitations for income

2 In this case, SEK 7.20 corresponds to US$1, calculated on the average daily exchange rate over the sample period 2004–2010. Income and portfolio value are expressed in the price level of the last sample year, using consumer price index from Statistics Sweden to adjust for inflation.

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Table 2 Number of Stocks. Panel A: Rookies in Sweden, Grouped by Income Income (decile)

Number of Rookies

Income (Min)

Income (Max)

Portfolio Value (Mean)

Age (Mean)

Gender

Number of Stocks (Min)

Number of Number of Stocks (Mean) Stocks (Max)

Low 2 3 4 5 6 7 8 9 High

22,869 22,869 22,870 22,869 22,870 22,869 22,869 22,870 22,869 22,870

0 0 0 75,951 150,328 215,148 262,483 304,084 350,624 433,887

0 0 75,950 150,327 215,145 262,472 304,081 350,618 433,886 891,213

33,650 33,412 38,809 58,805 54,826 45,872 41,951 41,836 47,191 75,361

14 14 25 52 48 44 43 43 43 46

0.59 0.58 0.64 0.35 0.41 0.47 0.59 0.65 0.69 0.76

1 1 1 1 1 1 1 1 1 1

1.93 1.91 2.15 2.17 2.17 2.17 2.12 2.12 2.20 2.40

57 75 66 50 49 73 73 51 58 57

Panel B: Rookies in Sweden, Grouped by Portfolio Value Portfolio Value Number of (decile) Rookies

Portfolio Value Portfolio Value Income (Min) (Max) (Mean)

Age (Mean)

Gender

Number of Stocks (Min)

Number of Number of Stocks (Mean) Stocks (Max)

Low 2 3 4 5 6 7 8 9 High

117 1042 2388 4326 6913 10,761 15,990 25,904 45,765 105,167

30 31 33 34 36 36 38 40 43 49

0.65 0.59 0.61 0.57 0.57 0.57 0.56 0.55 0.54 0.52

1 1 1 1 1 1 1 1 1 1

1.34 1.45 1.61 1.64 1.74 1.74 2.04 2.28 2.87 4.63

22,869 22,869 22,870 22,869 22,870 22,869 22,869 22,870 22,869 22,870

1042 2387 4325 6912 10,760 15,990 25,903 45,761 105,162 837,790

180,376 188,375 211,307 191,858 206,866 209,609 223,877 230,183 243,024 262,769

12 16 20 63 29 36 43 40 73 75

Notes: The table reports descriptive statistics of rookies in Sweden over the sample period 2004–2010. Panel A shows investor characteristics of rookies ranked and sorted into deciles based on level of income. Panel B shows investor characteristics of rookies ranked and sorted into deciles based on level of portfolio value. Portfolio value is defined as the total value of the portfolio for each investor, calculated at the end of December for each calendar year. Data on stock ownership are obtained from the Central Security Depository in Sweden (Euroclear Sweden). Income is the annual employment income for each investor, and the data are obtained from the Swedish Tax Agency (Skatteverket). For both panels, Income and Portfolio Value are winsorized at 1%-level, presented in SEK, Swedish Krona) and expressed in the price level of year 2010 (using consumer price index from Statistics Sweden to adjust for inflation). Number of Stocks is the number of different stocks (i.e., firms) in the portfolio. Age is the age of the investor in years. Gender is a dummy variable taking 0 for female and 1 for male investors. The number of observations is 228,694.

and individual characteristics of foreign investors, the final sample consists of 228,694 rookies. Thereby, rookies correspond to approximately 12 percent of the total number of individual shareholders in Sweden during the sample period. Age is defined as the age of the investor, not numbers of years the account has been open (experience), nor the oldest person within the household, which have been used in prior studies. Therefore, age, gender, and income are connected to the shareholder, rather than merely to someone at the same postal address. There are reasons to believe that portfolio values are comparable and the rookies can be expected to have the same possibility of holding a diversified portfolio regardless of their age. Similar to Andersson et al. (2015), increased age could reflect the amount of capital available for stock market investments, and that income could be a proxy for wealth. Age and income are used together with portfolio composition in order to explain the value of the stock portfolio. The univariate test between non-rookies and rookies, presented in Table 4, is based on data from only the last sample year, 2010. Where all rookies still holding stocks in 2010 are grouped as rookies, they are compared with the non-rookie group consisting of all individual shareholders not defined as rookies. Therefore, mean age in particular is slightly higher than in the other tables. 3.2. Multiple regression analyses Ordinary least squares (OLS) regression models of the portfolio value for rookies are used. Specifically, the following regression is estimated, PortfolioValuei,t = ␣+␤1 Incomei,t +␤2 Agei,t +␤3 Genderi +␤2 Number

of

Stocksi,t +␤5 HighPricei,t +␧i,t

(1)

where Income is the annual income for each individual, Age is the age of the investor, Gender is a dummy variable with a value of 1 for male and 0 otherwise, Number of stocks is the number of different stocks (i.e., firms) in the investor’s portfolio, and High price is a dummy variable with a value of 1 if the average stock price in the portfolio is higher than the average stock price and 0 otherwise. Massa and Simonov (2006) show positive correlation between investor sophistication and wealth. Goetzmann and Kumar (2008) report that the level of under-diversification is greater among younger, low-income, and less sophisticated investors.

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Kumar (2009) shows that less sophisticated individuals hold lottery-type stocks, that is, stocks with low nominal price, to a larger extent than more sophisticated investors. In addition, Nofsinger and Varma (2014) study lottery-type stocks and diversification, measured as number of stocks in investor portfolios. Therefore, income, age, number of stocks and high price are used to indicate a sophisticated rookie and are expected to be positively correlated to portfolio value. In addition income is used as a proxy for wealth, with higher income expected to increase the capital available for investing in a larger portfolio even during the first year. Age not only indicates life experience but also reflects the time to increase wealth (i.e. build capital to invest in the stock market). Male investors have higher income and hence, they are expected to hold larger portfolios. However, Barber and Odean (2001) report that males suffer from over-trading, which leads to an expectation that female investors gain larger returns and consequently larger portfolio value over time. 3.3. One-Stock portfolio analysis A logistic regression analysis is used in order to study characteristics of rookies who hold one stock vis-à-vis rookies who hold more than one stock in their portfolios.3 The one-stock dummy is used to test (passive) diversification, defined in Goetzmann and Kumar (2008), who state that investors deliberately diversify when holding more than one stock. The dependent variable, one stock, is a dummy variable with a value of 1 if the rookie holds only one stock and 0 otherwise. Income, portfolio value, age, gender, and stock price are used as independent variables, OneStocki,t = ␣+␤1 Incomei,t +␤2 PortfolioValuei,t +␤3 Agei,t +␤4 Genderi +␤5 High

Price ˇ6 Invest+␧i,t

(2)

where the one-stock dummy variable shows lack of diversification and is expected to be negatively correlated to income, portfolio value, age, and high price. As an alternative, to the high-price dummy, average price is used, and is calculated as portfolio value over total number of stocks. One way of diversifying the stock portfolio, even though the investor holds only one stock, could be to hold an investment firm. Therefore, a dummy variable, Invest, is introduced which takes a value of 1 if the rookie holds an investment firm. 4. Results Table 1 presents summary statistics. As reported in Panel A (C), the average number of rookies (population of all other individual investors) is 32,671 (1,656,646) across all sample years. The mean age of the rookie (population) investor is 37 (54) years for the sample period.4 The last two columns in Panel A (C) report the proportion of investors grouped by gender. For rookies (non-rookies) there are 57 (58) percent male and 43 (42) percent female investors. This is consistent with results reported from Finnish studies in Grinblatt and Keloharju (2000, 2001). Differences compared to U.S., studies, such as Lease et al. (1974) and Barber and Odean (2001), can be explained by different timeframes, or different definitions of the owner. Such differences highlight the need for studies of shareholders rather than proxies for household account signatures. Comparing the number of rookies entering the stock market based on gender with the population of Swedish shareholders shows a coherent and rather balanced gender distribution. The largest differences between male and female rookies are in 2008 and 2009, that is, during the financial crisis. This suggests that male investors, to a larger extent than female investors, invest when the stock market conditions are bearish rather than bullish, as previously shown in Finland.5 Panel C shows that the numbers of shareholders are declining during the sample years, this supports previous U.S. studies (Lease et al., 1974; Davis, 2009; Rydqvist et al., 2014). Furthermore, the results from Table 1 strengthen the reasoning of previous studies that investors are leaving the stock market, especially since Panel A clearly shows that rookies are entering the stock market. If the declining trend is shown despite the entry of rookies, the decline among existing shareholders is enlarged. Panel B (D) reports statistics of four variables related to stock ownership: portfolio value, income, age and number of stocks in the portfolio. As reported, portfolio value and income are positively skewed. There are on average two (three) stocks in an investor’s portfolio for the sample of rookies (population), which is consistent with Barber and Odean (2001).6 However, the median rookie portfolio holds only one stock. This is consistent with Kelly (1995), who reports that the median holding of a U.S. investor is just one stock. Swedish rookies hold even less diversified stock portfolios than U.S. investors; 95 percent of the rookies hold five stocks or less. This can partly be explained by rookies being inexperienced investors but also for example, by transaction costs tempting the rookie to lower the number of transactions.

3

62 percent of the rookies hold only one stock in their portfolio (not reported). 11 percent of the rookies are older than 65 years, which is the normal retirement age in Sweden. This shows that some investors move in the opposite direction of realizing savings when retired. The insight that retiree can be rookies might be explained by life expectancy in Sweden, which is far beyond the retirement age or simply by a new interest in the stock market at the end of time-consuming work life. 5 A t-test is used to test the difference in proportion of male rookies during the financial crisis (2008–2009) to the overall sample. The test shows significant results of a larger proportion of male rookies during 2008–2009. This supports Hoffmann et al. (2013) that individuals see investment opportunities in a bear market, and the market conditions seems to attract more male rookies into the stock market. 6 Kumar and Lee (2006) show that U.S. investors have a concentrated stock portfolio with a mean (median) of four (three) stocks, same as in Durand et al. (2008). Dividing the population of all Swedish individual investors with respect to income, this corresponds to the wealthiest Swedish investors (not reported). 4

M. Abrahamson / Research in International Business and Finance 38 (2016) 565–576

Number of Stocks

a

571

3 2.5 2 Mean

1.5

Median

1 0.5 0 2004 2005 2006 2007 2008 2009 2010

Number of Stocks

b

3.5 3 2.5 2

Mean

1.5

Median

1 0.5 0 2004 2005 2006 2007 2008 2009 2010

Fig. 1. (a) Number of Stocks in the Rookie’s Portfolio. (b) Number of Stocks in the Non-Rookie’s Portfolio. Note: Fig. 1a shows the mean and median development of the number of stocks in a rookie portfolio over the sample period. Note: Fig. 1b shows the mean and median development of the number of stocks in individual (non-rookie) investor portfolios over the sample period. Table 3 Correlation Matrix. Variable

Portfolio Value

Income

Age

Gender

Number of Stocks

High Price

Portfolio Value Income Age Gender Number of Stocks High Price

1.00 0.09 0.19 −0.04 0.40 0.12

1.00 0.41 0.13 0.05 −0.02

1.00 −0.16 0.08 0.05

1.00 −0.16 −0.09

1.00 0.06

1.00

Notes: The table reports correlation between the variables used in the study. Portfolio value is defined as the total value of the portfolio for each investor. Portfolio value is calculated at the end of December for each calendar year. Data on stock ownership are obtained from the Central Security Depository in Sweden (Euroclear Sweden). Income is the annual employment income for each investor where data are obtained from the Swedish Tax Agency (Skatteverket). To reduce the impact of outliers, portfolio value and income are winsorized at the 1 percent level. Age is the age of the investor. Number of Stocks is the number of different stocks (i.e., firms) in the portfolio. Gender is a dummy variable taking 0 for female investors and 1 for male investors. High Price is a dummy with 1 referring to the investor’s average stock price in the portfolio being higher than the average stock price for the sample period. The number of observations is 228,694.

Fig. 1 shows that the underdiversification reported in U.S. studies holds for (a) rookies, but also for the (b) entire population of Swedish individual shareholders. Fig. 2a shows the mean and median portfolio value of the rookies. The figure shows that the mean value of the rookies’ stock portfolio differs substantially over the sample period. The median portfolio has a similar pattern to the mean portfolio. However, the median portfolio values over the sample years show less variation. Although, the portfolios are only first-year portfolios of rookies, the pattern of the mean portfolio follows shows a similar pattern of portfolio development for all non-rookie portfolios (Fig. 2b) over the sample period. Table 2 shows the number of stocks of rookies during the sample period. Panel A presents summary statistics of investor groups based on level of income, where the groups with lower income hold less numbers of stocks compared to the higher income groups. Campbell (2006) seeks evidence for the hypothesis that higher income is connected with higher diversification. The results in this table answer his call for evidence and support that hypothesis; a larger number of stocks are

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Porolio Value (SEK)

a

70000 60000 50000 40000

Mean

30000

Median

20000 10000 0 2004

Porolio Value (SEK)

b

2005

2006

2007

2008

2009

2010

180000 160000 140000 120000 100000 80000 60000 40000 20000 0

Mean Median

2004 2005 2006 2007 2008 2009 2010 Fig. 2. (a) Portfolio Values of Rookies. (b) Portfolio Values of all Non-Rookies. Notes: Fig. 2a shows the development of the mean and median portfolio value of rookies over the sample period. To reduce the impact of outliers the portfolio values are winsorized at the 1 percent level. Portfolio value is presented in SEK, Swedish Krona. Notes: Fig. 2b shows the development of the mean and median portfolio of non-rookies value over the sample period. To reduce the impact of outliers, portfolio value and income are winsorized at the 1percent level. Portfolio value is presented in SEK, Swedish Krona.

associated with rookies with higher income, but also with higher portfolio value. As an alternative to income, Panel B presents summary statistics of investor groups based on level of portfolio value. This shows that groups with higher portfolio value on average hold a higher number of stocks in their portfolios. Table 3 presents a correlation matrix of tested variables. As expected, positive correlation between portfolio value and income is found. In addition, portfolio value is positively correlated to age, number of stocks in the portfolio, and high price. As reported, income shows positive correlation to number of stocks in the portfolio, age, and gender, with male rookies on average earning more than female rookies. However, gender is negatively correlated with portfolio value, age, number of stocks in the portfolio, and high price. This suggests that female investors hold larger portfolios, both in terms of value and number of stocks, and with a higher nominal price, but that they are also older when they enter the stock market. The positive relationship between age and income is not surprising, showing that income rises with age. The positive relationships between portfolio value and age as well as between age and number of stocks (diversification) support age as an indicator of life experience and possibly also investor sophistication7. Goetzmann and Kumar (2008) show a positive relationship between age, income, and diversification of the portfolio. The results in Table 3 support Goetzmann and Kumar (2008) but also show a positive relationship between age and portfolio value. The positive correlation reported in Table 3 between income and passive diversification, that is number of stocks in the portfolio, supports the results in Massa and Simonov (2006) and Calvet et al. (2009). Our results show that the positive correlation between income and passive diversification also holds for rookies. However, even rookies with the largest income hold under-diversified stock portfolios.

7 However, the positive relationship between age and diversification is weak, as presented in Table 2. Therefore, as robustness check, the investors were divided into 10 age groups, but investors in all age groups show the same median number of stocks (diversification).

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573

Table 4 Univariate Analysis of Investor Characteristics of Non-Rookies and Rookies. Variable

Non-Rookies

Non-Rookies

Rookies

Rookies

Difference in mean test t-stat

Wilcoxon (Mann–Whitney) z-stat

Mean

Median

Mean

Median

[p-value]

[p-value]

Income

284,621

261,645

235,227

237,898

Portfolio Value

170,872

21,814

71,210

14,628

Number of Stocks

3.28

2

2.59

1

One Stock

0.45

0

0.55

1

Age

55

57

39

39

Gender

0.58

1

0.56

1

96.28 [<0.001] 150.95 [<0.001] 81.19 [<0.001] −77.43 [<0.001] 288.43 [<0.001] 19.74 [<0.001]

91.80 [<0.001] 114.84 [<0.001] 79.17 [<0.001] −77.32 [<0.001] 271.00 [<0.001] 19.85 [<0.001]

Number of Observations

1, 540,541

179,329

Notes: The table reports results from univariate analysis on mean investor characteristics based on the investor groups, non-rookie, or rookie still holdings shares in year 2010. Portfolio value is defined as the total value of the portfolio for each investor. Portfolio value is defined as the total value of the stock portfolio for each investor, calculated at the end of December. Data on stock ownership are obtained from the Central Security Depository in Sweden (Euroclear Sweden). Income is the annual employment income for each investor with data obtained from the Swedish Tax Agency (Skatteverket). To reduce the impact of outliers, portfolio value and income are winsorized at the 1 percent level. Number of Stocks is the number of different stocks (i.e., firms) in the portfolio. One stock is a dummy variable with a value of 1 if the investor holds only one stock and 0 otherwise. Age is the age of the investor. Gender is a dummy variable that takes the value of 1 if the investor is a male and 0 otherwise. Difference in mean test is a t-test allowing unequal variance. For robustness the same t-test was undertaken for every sample year, with similar results. As alternative to the t-test the Wilcoxon [Mann-Whitney] rank sum test is used. Portfolio value and income are presented in SEK, Swedish Krona. Table 5 Univariate Analysis of Gender Differences among Rookies. Variable

Female

Male

Difference mean test (t-stat)

Wilcoxon (Mann-Whitney) z-stat

Mean

Median

Mean

Median

[p-value]

[p-value]

Income

187,050

184,158

235,406

248,028

Portfolio Value

52,377

11,818

43,314

9946

Number of Stocks

2.17

1

2.11

1

One Stock

0.62

1

0.61

1

Average Price/Stock

87.87

61.00

72.81

52.22

Age

41

43

34

33

Invest

0.097

0

0.086

0

−63.95 [<0.001] 17.93 [<0.001] 5.88 [<0.001] 2.84 [0.005] 43.98 [<0.001] 77.02 [<0.001] 8.80 [<0.001]

−56.82 [<0.001] 30.89 [<0.001] −1.54 [0.123] 2.84 [0.005] 58.43 [<0.001] 80.3 [<0.001] 8.87 [<0.001]

Notes: The table reports results from univariate analysis on characteristics based on the gender of the rookie. Portfolio value is defined as the total value of the portfolio for each investor. Portfolio value is calculated at the end of December for each calendar year. Data on stock ownership are obtained from the Central Security Depository in Sweden (Euroclear Sweden). Income is the annual employment income for each investor where data are obtained from the Swedish Tax Agency (Skatteverket). To reduce the impact of outliers, portfolio value and income are winsorized at the 1 percent level. In addition, portfolio value and income are and expressed in the price level of year 2010 (using consumer price index from Statistics Sweden to adjust for inflation). Number of Stocks is the number of different stocks (i.e. firms) in the portfolio. Avg. Price/Stock is the average price of all stocks in the investor’s portfolio, calculated as portfolio value over total number of stocks across all firms. Age is the age of the investor. Difference in mean test is a t-test allowing unequal variance. The number of observations is 228,694, with 97,338 being female investors and 131,356 male investors. The value is presented in SEK, Swedish Krona.

4.1. Univariate analyses Tables 4 and 5 report univariate analyses of the variables sorted by the investor groups. Table 4 shows the analysis of rookies and non-rookies, in year 2010. The mean difference is examined using a t-test, and a Wilcoxon rank-sum test is used to test the hypothesis that the median differences are equal to 0. The p-values for both tests are reported in brackets, for all variables, the differences are statistically significant. For non-rookies, the mean income, portfolio value, and the number of stocks in the portfolio are higher than for rookies. Consequently, the fraction of non-rookies holding only one stock is smaller than for rookies. Rookies are younger than non-rookies, which contributes to the rejuvenation of the average individual shareholder. The proportion of male investors is higher for non-rookies, which shows that rookies contribute to the gender balance. For both groups, gender balance is fairly even, which is similar to the reported gender balance in

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Grinblatt and Keloharju (2000, 2001). This should affect future gender proxies regarding financial decisions of households, and shows that previous proxies might be questioned, at least in Sweden. In addition, Table 4 shows that more than three out of four rookies still hold shares at the end of the sample period (78 percent based on 179,329 rookies still holding shares in year 2010 compared with total sample size of 228,694 rookies), which strengthens the argument of stock market investor rejuvenation through the rookies. Table 5 reports the univariate analysis based on the gender of the rookie. The mean difference is examined using a t-test.8 As alternative a Wilcoxon rank-sum test is used. The p-values for both tests are reported in brackets. The mean annual income is higher for male rookies than female rookies, and the mean difference is highly statistically significant. Female rookie investors hold larger portfolios than male rookies do, even though the income of female rookies is smaller. Prior research has shown that individual investors hold undiversified stock portfolios, and this is evident in our sample too. Specifically, the third row of Table 5 shows that the average female investor holds a slightly more diversified portfolio than her male counterpart. The average price per stock is higher for female rookies than for male rookies, and the mean difference is highly significant. The average female rookie is older than her male counterparts, and the difference is highly significant. In summary, the results show that female investors are older, and hold larger and more diversified portfolios than their male counterpart, although the average male rookie has larger income. The gender differences reported might be explained partly by Goetzmann and Kumar (2008): as the female rookies are older, this can explain why their portfolio values are higher. However, although female rookies are older and have larger portfolios, their income is smaller compared to male rookies. Taken together, the relationship between portfolio value and income is affected by differences among the average income between male and female investors. The gender difference in portfolio value might be explained partly by overtrading as in Barber and Odean (2001), but since only the holdings of the first year are considered, this might not tell the whole story. Male investors are slightly overrepresented in the sample, which could indicate that the threshold for entering the market is larger for female investors than for male investors. In addition, age could explain some of the gender difference, since age is positively correlated with portfolio value in this study as well as in previous studies. Although, age is normally positively correlated with income at least until retirement, in the sample the female rookies have smaller income than the male rookies have. Taken together, the results show that, when female rookies invest in the stock market for the first time they do so with a higher proportion of their income than their male counterparts. To control for any age distribution effects, the same analysis is performed by excluding all rookies older than 65 years, and in another test, by also excluding all rookies under the age of 18 years, both robustness tests return similar results to the full sample. 4.2. Multiple linear regression analysis In Table 6, the natural logarithm of the investor’s portfolio value is the dependent variable. The portfolio value is explained through investor characteristics—income, gender, age, and the number of stocks in the rookie’s portfolio—and a dummy variable for high price. All the explanatory variables are significant. Income, age, and high price are positively related to portfolio value. The gender dummy variable coefficient is negative, showing that female portfolio values are higher than male portfolios. This is consistent with the correlation matrix and univariate analysis, in which the gender variable is negative. As expected, and consistent with previous research, the number of stocks in the portfolio and stocks with high nominal price are positive, showing that rookies with larger portfolio value also hold more diversified portfolios.9 4.3. Rookie portfolio selection Table 7 presents the results of a logistic regression, in which the one-stock dummy is the dependent variable. Income, portfolio value, age, and dummy variables for gender and high price are used to explain whether the investor holds one or more stocks in the portfolio. The results are presented in two models, the first showing only income and portfolio value as explanatory variables and the second including age, gender, and high price. The result of the first regression is presented in columns 2 and 3, and the second in columns 4 and 5 of Table 7. In model 1, both income and portfolio value are negative and significant, showing that rookies with higher income and portfolio value hold more than one stock in their portfolios, that is, they are more diversified. However, as shown in models 2 and 3, income is not significant when more explanatory variables are introduced. Age and high price are both negative and significant, which supports previous results and shows that they can be seen as indicators of sophistication and thereby, more diversified investor portfolios. In addition, gender is negative and significant, showing that female rookies are less likely to hold only one stock, and thereby are, at least passively, more diversified than male rookies. The invest dummy is used to test if the one-stock portfolio could still be a diversified stock portfolio through the investment portfolio of the stock.

8

For robustness, the t-test is also performed excluding 2008 and 2009, but the results continue to hold. Year dummies and a financial crisis dummy (year 2008, 2009) were also used in the regression, without major impact on the result. This supports Hoffmann et al. (2013), showing that individuals continue to invest in stocks even when the stock market is in a crisis. 9

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575

Table 6 Ordinary Least Squares-Regression Results. Portfolio Value (ln) Regression Model

(1)

(2)

(3)

(4)

(5)

8.997*** (1582.19) 0.00120*** (59.70)

8.439*** (1109.53) 0.00024*** (11.05) 0.021*** (107.23)

8.524*** (929.61) 0.00032*** (14.38) 0.020*** (100.19) −0.126*** (−16.45)

8.114*** (902.82) 0.00027*** (13.08) 0.018*** (94.43) −0.124*** (−17.18) 0.233*** (168.02)

0.015

0.063

0.064

0.167

7.920*** (861.70) 0.00031*** (15.13) 0.017*** (92.57) −0.084*** (−11.70) 0.227*** (165.77) 0.575*** (79.99) 0.190

Variable Constant Income Age Gender Number of Stocks High Price Adjusted R2

Notes: The table reports results from the regression of natural logarithm of portfolio value as the dependent variable and income, age, gender, diversification, and average stock price as explanatory variables. Portfolio value is defined as the total value of the stock portfolio for each investor. Portfolio value is calculated at the end of December for each calendar year. Data on stock ownership are obtained from the Central Security Depository in Sweden (Euroclear Sweden). Income is the annual employment income for each investor, where data are obtained from the Swedish Tax Agency (Skatteverket). To reduce the impact of outliers income is winsorized at the 1 percent level, and thereafter income is divided by 1000 to reduce the number of zeros. Portfolio value and income both use SEK, Swedish Krona and are expressed in the price level of year 2010 (using consumer price index from Statistics Sweden to adjust for inflation). Age is the age of the investor. Gender is a dummy variable with 1 for male investors and 0 for female investors. Number of Stocks is the number of different stocks (i.e., firms) in the investor’s portfolio. High price is a dummy with 1 referring to the investor’s average stock price in the portfolio being higher than the average stock price for the sample period and 0 otherwise. *** denotes significance at the 1 percent level. The t-statistics for the coefficient estimates are reported in parentheses. For all models, the number of observations is 228,694. Table 7 Logistic-Regression Results on One Stock Portfolio. Variable

Intercept Income Portfolio Value Age Gender High Price Invest Pseudo R2

Model 1

Model 2

Model 3

Coefficient

p-value

Coefficient

p-value

Coefficient

p-value

0.74886*** −0.00006** −0.00633***

<0.001 0.022 <0.001

0.85832*** 0.00006** −0.00624*** −0.00187*** −0.09435*** −0.03851***

<0.001 0.024 <0.001 <0.001 <0.001 <0.001

1.03615*** 0.00004 −0.00560*** −0.00468*** −0.10662*** 0.20278*** −1.92554*** 0.0931

<0.001 0.187 <0.001 <0.001 <0.001 <0.001 <0.001

0.0507

0.0512

Notes: The table reports results from the logistic regression of the one-stock dummy, which takes the value of 1 if the investor holds only one stock and 0 otherwise. Data on stock ownership are obtained from the Central Security Depository in Sweden (Euroclear Sweden). Portfolio value is calculated at the end of December for the calendar year. Income is the annual employment income for each investor, and the income data are obtained from the Swedish Tax Agency (Skatteverket). To reduce the impact of outliers income and portfolio value are winsorized at the 1 percent level, and are thereafter, divided by 1000 to reduce the number of zeros. Age is the age of the investor. Gender (High Price) is a dummy variable that take value of 1 for male investors (and average stock price in the investor portfolio being larger than the average stock price on the stock market) and 0 otherwise. Invest is a dummy variable that takes a value of 1 if the investor holds an investment firm. **, *** denote significance at the 5, 1 percent level, respectively. The Number of rookies/observations is 228,694.

However, the result shows that investors with only one stock are less likely to hold an investment firm than investors with more than one stock. The rookies invested in 430 different stocks altogether, and thus it appears that any firm could attract the attention of the rookie. However, further analysis shows similarities in the portfolio selection. The stock selections of rookies are studied in order to determine which stocks attract these investors to the stock market. All portfolio assets are sorted in value order, and ranked as largest, second largest etc. up to the fifth largest holding of each investor (95 percent of all holdings). For each year, a largest stocks (30) dummy variable is created based on firm value (in total 35 firms over the sample period). In the rookie sample more than 99 percent of rookies hold at least one stock out of these largest firms, that is, rookies hold stocks with the largest firm value in the stock market. Thereby, it seems that rookie investors buy stocks that are well known to them (based on familiarity). This supports previous studies on portfolio selection bias among individual investors (e.g., Grinblatt and Keloharju, 2001; Huberman, 2001). In addition the majority of rookies put all their eggs in one basket, investing in only one stock without any diversification, which supports the results presented in Kelly (1995). 5. Concluding remarks Stock ownership for a sample of new (rookie) shareholders is studied over the period 2004–2010. By exploiting a unique data set of all stock holdings in Sweden, several contributions are made to the existing literature of individual investors, as the data used are more detailed than in prior studies. The results answer the call from Campbell (2006) and shows ample evidence that higher income is related to higher diversification even among rookies. A model to explain portfolio value of the investor is presented, in which income, age, and number of stocks are positively related to portfolio value. In addition,

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the study shows that Swedish rookies hold less diversified stock portfolios than experienced Swedish and US investors. Most rookies choose only one relatively large and well-known firm as their first investment in the stock market. This study supports U.S. forecasts of a declining trend of individual investors as shareholders. However, this study provides evidence of rejuvenation amongst individual shareholders and that, despite the declining trend, the stock market attracts rookies. Furthermore, the shareholders are portrayed, and this shows a more balanced gender distribution amongst the shareholders than previously used as a proxy when studying households. This should affect future research and proxies used for gender balance among shareholders. In addition, the study shows that for all Swedish rookies, the average female investor holds a larger portfolio, both in value and number of shares, than her male counterpart. Acknowledgements The author would like to express his appreciation for valuable comments on previous versions of this paper by Tom Berglund and Lawrence Kryzanowski, among others at the 15th annual SNEE meeting in Mölle in 2013, as well as to Mika Vaihekoski, F.Y. Eric C. Lam, Gianluca Mattarocci, Vivek Singh, Radu Taru, Alexander Kerl and Viet Cao at the 2013 Merton H. Miller doctoral seminar at the 2013 EFMA in Reading, UK. In addition the paper benefitted from valuable comments from Keldon Bauer and the participants at Southwestern Finance Association Annual Meeting 2015 in Houston, as well as from Javier Rodriguez and participants at the Eastern Finance Association Annual Meeting 2015 in New Orleans, and from Michael Dowling and an anonumous referee. The author would also like to express special thanks to Adri De Ridder, Jonas Råsbrant, Joakim Persson and seminar participants at Uppsala University, and Exeter University (Center for Finance, Xfi) for valuable comments. 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