Institutional reform and depositors' portfolio choice : evidence from censored quantile regressions

In this paper we study the effect of institutional reform on the decision to hold risky assets at the extensive and the intensive margin. We therefore make use of the natural experiment of German Division and Reunification and, based on savings bank customer data from German savings banks, study whether the customers of East German banks differ from their West German counterparts. While we find only slight differences in the decision to hold risky assets at the extensive margin, the differences turn out to be much larger at the intensive margin. Moreover, the latter effects turn out to be quite persistent even in the age group of individuals which were too young at the time of German Reunification to have collected financial experiences in one of the previously existing systems. Our results support the view that reforms allowing individuals to get easy access to financial markets quite quickly result in increasing market participation. However, the degree and sort of risk, individuals are willing to bear, seems to change only slowly as the portfolios of East and West German savings bank customers still differ considerably 15 years after German Reunification. We attribute this finding to the only slowly changing informal institutions.