The Role of Objective and Subjective Financial Literacy in Stock Market Participation: The SCF Evidence

Abstract

This study uses the newly available financial literacy data, instead of proxies, from the Survey of
Consumer Finances to assess the role of objective and subjective financial literacy on the stock market participation puzzle. Recognizing that the actual and perceived financial literacy may affect financial decisions through different mechanisms, this study examines the effects that the discrepancy between objective and subjective financial literacy has on directly-held and indirectly-held stock investment. We control for demographic characteristics and financial factors and find that objective literacy has more power to predict stock market participation, while subjective financial literacy only has a marginally significant impact on directly-held stock holdings.