Is Financial Advice a Cure-All or the Icing on the Cake for Financial Literacy? Evidence From Financial Market Participation in China

Posted: 23 Feb 2021

See all articles by Xuefeng Pan

Xuefeng Pan

University of International Business and Economics (UIBE) - School of Banking and Finance

Weixing Wu

University of International Business and Economics (UIBE)

Xuyang Zhang

affiliation not provided to SSRN

Date Written: May 1, 2020

Abstract

We examine how financial advice interacts with financial literacy to shape household decisions on stock market participation in China. Particularly, we investigate how the effect of financial advice varies with economic expectations, preferences for asset diversification and the level of financial literacy. Feeding the data of 5274 households into a Probit model that predicts the probability of holding stocks, we find that, while an increase in financial literacy significantly raises the stock market participation of all households, seeking financial advice only increases the participation for those households which have a preference for asset diversification or which have an optimistic expectation about the economy. Moreover, the effect of financial advice is concentrated on households with high financial literacy, implying that an insufficient level of financial literacy is the reason for the poor performance of financial advice in China. We also examine if there are influential trust or quality concerns which would reduce the effectiveness of financial advice but we find no significant evidence for it.

Keywords: Financial Advice; Financial Literacy; Stock Market Participation; Diversification

JEL Classification: D12; D14; G00; G19

Suggested Citation

Pan, Xuefeng and Wu, Weixing and Zhang, Xuyang, Is Financial Advice a Cure-All or the Icing on the Cake for Financial Literacy? Evidence From Financial Market Participation in China (May 1, 2020). International Review of Financial Analysis, Vol. 69, No. 101473, 2020, Available at SSRN: https://ssrn.com/abstract=3756138

Xuefeng Pan (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Weixing Wu

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Xuyang Zhang

affiliation not provided to SSRN

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