Participation Constraints in the Stock Market : Evidence from Unexpected Inheritance Due to Sudden Death

This paper exploits a natural experiment to investigate the impact of participation constraints on households' decision to invest in the stock market. Exogenous variation in financial wealth results from unexpected inheritance due to sudden deaths, and allows us to examine the causal impact of fixed entry and participation costs on stock market participation. We find that unexpected inherited wealth has a strong positive effect on participation. Moreover, households which inherit stocks rather than cash are significantly more likely to hold stocks in the future supporting investment inertia. Although, these results provide evidence of the existence of fixed entry costs, a substantial fraction of households still do not respond to sizeable windfalls. This suggests that many households are constrained by psychological factors such as gambling aversion or insufficient knowledge about their investment opportunities