Household Portfolio Choice Post-Bankruptcy Accounting for Household’s Endogeneity

This paper analyses household portfolio choice post-bankruptcy using the 2019 Survey of Consumer Finances (SCF) data set. While much work has been done on the determinants of household bankruptcy, the effect of bankruptcy on household investment preferences has received limited attention. Although we find that household risk tolerance and stock market participation are lower following personal bankruptcy, there is a post-bankruptcy life cycle where risk tolerance and stock market participation gradually revert back toward a normal level over time. Furthermore, financial literacy is greater than average following bankruptcy, and gradually increases toward an even higher level over time. Our econometrics treatment is to employ Instrumental Variable and Heckman models to address endogeneity and possible selection biases. Our instrument is information on whether one or more of the parents is still alive. Our idea is that parents might ease some of the financial stress for their children