The University Record, January 18, 1999

Study finds children’s portfolios often mirror those of their parents

By Bernie DeGroat
News and Information Services

Young adults raised in families that owned bank accounts or stocks are more likely to have these kinds of financial assets themselves than those adults whose families did not have such resources growing up, say U-M researchers.

“Our study results suggest the presence of a relationship that is quite intuitive, but one that has not been previously analyzed,” says Frank Stafford, professor of economics and senior research scientist at the Institute for Social Research (ISR). “We find substantial intergenerational effects—children’s portfolio choices are influenced a great deal by the holdings of their parents.”

In their study of nearly 2,000 heads of household nationwide, ages 25–54, Stafford and ISR researcher Ngina S. Chiteji found that 82 percent of young adults whose parents had a bank account now have one themselves (compared with 52 percent of those whose parents did not). Further, those raised in families that had a bank account have a balance that is about twice as large ($9,250 on average) as those whose parents did not have an account ($4,550).

A similar pattern of parental influence holds for stock ownership, as well, the researchers say. About 44 percent of young families whose parents owned stocks now hold equities themselves (compared with 24 percent of those whose parents did not) and, on average, balances are higher for households whose parents also owned stocks ($12,200, compared with $7,800 for those whose parents did not).

“The data appear to support a hypothesis that children whose parents own assets are being influenced by their parents’ behavior and, perhaps, benefiting from early exposure to financial assets,” Stafford says. “More broadly, there may be some learning about assets that takes place in the home.”

Consistent with prior research, Stafford and Chiteji also found substantial differences in bank and stock holdings by race. Even among families with similar levels of education and income, large differences in asset ownership exist between African American and other households.

For example, only about one-third of young African American families have bank accounts, compared with more than 80 percent of other households. In addition, bank account balances for non-African Americans are more than three times as much as those of African Americans, and the proportion of non-African American households whose parents owned bank accounts is about double the percentage of African American families whose parents owned such accounts (about 87 percent vs. 43 percent).

Moreover, non-African Americans are three times as likely as African Americans to invest in stocks—with more than five times the holdings, the researchers say.

“These data suggest that if exposure by parents during one’s childhood matters toward determining what a child does in financial markets later in life, part of the racial gap that presently is observed in asset ownership may stem from differences in exposure during childhood,” Stafford says.

Besides race differences, the study shows that many other differences exist between young families that have financial assets and those that do not. Aside from having more economic resources, adults who own bank accounts and stocks are more likely to be married, non-African American, and have a higher level of education than those who have no financial holdings.

“Overall, our study reveals another way that the economic environment of the home in which a child is raised affects the child’s adult outcomes,” Stafford says. “Parents can be influential in exposing their children to financial options.”

The U-M study used data from the Panel Study of Income Dynamics, a nationally representative study of U.S. households that covers a variety of demographic, socioeconomic and financial characteristics. It was presented at the meetings of the American Economic Association in early January.

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