Securities regulation, household equity ownership, and trust in the stock market

Using aggregate data from national accounts, we study whether strengthening and harmonizing securities regulation across the European Union increases household equity ownership. We find a significant increase in the proportion of liquid assets invested in equity, both when a household's own country adopts the regulation and when other countries adopt the regulation. To directly explore the mechanism through which households' willingness to directly invest in the equity market increases, we show that the effect of securities regulation is stronger in countries where trust is low and between countries where cultural biases are most pronounced.