Stock Market Participation with Formal versus Informal Housing Debt

We study whether mortgage debt obtained from licensed financial institutions and informal home loans obtained from private lending have differing impacts on stock ownership. Using the China Household Finance Survey data, we show that the two forms of borrowing have opposite effects on stock market participation. Mortgage debt is positively, while informal home loan is negatively, related to a household’s likelihood and degree of stock market participation. Further tests based on instrumental variables suggest a causal impact of mortgage debt and informal home loan on stock market participation. The positive role of mortgage debt is more pronounced among urban, highly educated, or financially literate households, while the negative role of the informal home loan is more visible among rural households and those with lower levels of education or financial literacy. High borrowing cost plays an important role in the negative impact of the informal home loan on household stock investing.