Risk Report And China Household Stock Participation Behavior

In the 19 th National Congress of Communist Party of China,Xi Jinping proposed the three critical battles against preventing and defusing financial risks,targeted poverty alleviation,and pollution control to build a moderately prosperous society.Preventing and defuse major risks is put in the first place.Among preventing and defusing major risks,prevention of financial risks is one of the top priorities.The development of financial market is accompanied by risks,but there are large differences in professional ability,understanding of risks and risk-taking ability among retail investors compared with institutional investors.Existing research on household stock investment takes more into account the demographic,economic,and psychological characteristics of households,while neglecting the issue of how households understand changes in external risk and make equity investment decisions.In just forty years after the reform and opening up,China’s GDP doubled 275.5 times from1978 to 2020,going through the modernization process of Western countries for hundreds of years.However,the dramatic changes in external risks have had a rather drastic impact on Chinese households’ beliefs.There is inertia in the decision-making behavior of many households,who still carry with them the life experience and behavioral habits accumulated in their past lives.Comparing with other developed markets,the large number of retail traders is an important feature of the Chinese stock market.The volatility of the stock market is easily influenced by retail investors and the level of wealth of households as retail investors can fluctuate dramatically.According to statistics from the China Securities Association,99.84%of the accounts opened in China’s stock market at the end of December 2021 were held by individual investors.This makes the behavior of individual investors have a significant impact on the performance of Chinese stocks.Existing studies have concluded that individual investors lack the financial knowledge reserves and risk control capabilities needed to make stock investments.When making stock investments,retail investors lack research on company fundamentals.Their investment behavior is mostly short-term investments and speculative trading,rather than long-term value investments.The core of stock investment is the trade-off between risk and return,and the proportion of wealth that households spend on investment,consumption and savings is influenced by the level of risk and return.Therefore,systematically analyzing the impact of risk on the decision-making behavior of household investors and guiding rational investment has become an important issue in resolving major risks and adding overall wealth of residents.With the advancement of globalization,the development of scientific and technological innovation and the changing international situation,the world has entered the era of "risk society" with a high degree of uncertainty.The frequency and consequences of risks are much more complex than in traditional societies.There are various types of risks that families often encounter in their lives,including not only risks from nature such as natural disasters and climate change,but also risks related to human behavior and decision-making,such as financial crises,policy changes,international relations and technological progress.Ubiquitous risks not only affect the way people live their lives,but also have a significant impact on households’ investment decisions.In fact,household investment decisions are closely related to the public opinion environment.Newspaper and other media reports on risk can influence the risk beliefs of households,which in turn affects their asset allocation.First,the transmission channel and process of risk information to households is very important.When external risks change,if households do not have a channel to be informed of the change in risk,investment decisions cannot take the factor into account.Second,most households do not have the energy and ability to collect risk information,and mass media such as newspaper reports are important sources of information.In addition to the direct channels represented by personal experience,the indirect channels such as media reports are also important for households’ risk beliefs.Based on the magnitude of risk hazards or the controllability of risks advertised in newspapers,social opinion can be formed and influence households’ attitudes toward risks.Therefore,the management of risk reports to change the risk beliefs of households becomes an important tool to educate individual investors to sort out rational investment concepts and risk prevention awareness.This can influence households’ asset allocation decision and let them share the benefits of China’s economic development.Also,participate in stock market will promote the overall building of a well-off society and the achievement of common prosperity.Many studies in the field of corporate finance find that newspaper coverage has an important impact on corporate decision making.Newspapers influence decision-making behavior by eliminating information asymmetry and attracting investors’ attention.Likewise,the information conveyed by newspapers can contribute to the formation of a social opinion environment and have a significant impact on the beliefs of households.Newspapers have advantage in collecting and organize risk information in the region.A large number of professional journalists collect first-hand information in the region where the risk event occurs and prepare news reports for publication in newspapers,which can help readers who are not in the region to understand the causes,hazards,or opportunities of the risk event and alleviate the potential information asymmetry.Accordingly,this paper measures the level of risk in newspaper reports from the perspective of risk belief and analyze whether and how risky reports affect Chinese households’ stock investments.After sorting out the risk factors affecting household stock investment and the risk sources from which households obtain information,this paper constructs a theoretical model to analyze the two channels through which newspaper reports affect households risk beliefs,namely risk perception and risk attitude.To more accurately portray the level of risk,this paper uses a text analysis method to extract risk related information from more than 1.7 million reports in local daily newspapers of 31 provinces,and calculates the percentage of risky reports and risky report sentiment indicators to measure the level of risk in the social opinion environment.In the empirical analysis,this paper measures the impact of the level of risky reports on household stock investment decisions based on a panel Probit model,and analyzes whether there are significant differences in the impact of risky reports on household stock investment under household background characteristics and different risk characteristics.The specific process and core findings of this paper are as follows.First,this paper systematically sorts out the risk factors and information sources that affect household stock investment.At the core of stock investment is the trade-off between risk and return.This paper compares the impact of macro-level,financial market and firmlevel,and household-level risks on household stock investment decisions in the existing literature to lay the foundation for the subsequent empirical analysis.Subsequently,the main sources of information that households are informed about are analyzed.In general,information affecting investment decisions can be divided into private information and public information.Generally speaking,private information is mostly transmitted through the social network of family and friends,while the sources of public information include information published directly by listed companies,information provided in analysts’ reports,and information collected by newspapers and other news media.Among them,the reports of newspapers and other news media are not only low cost to obtain,but also can basically analyze the risk content from a neutral perspective.Newspaper is one of the most accessible channels for individual investors to obtain objective risk information.Second,this paper analyzes how the information reported in the media affects households’ decisions with the help of SIR model and sticky information theory.In the process of information diffusion,newspapers,as a kind of influential mass media,greatly accelerate the speed of information diffusion by virtue of their identity as opinion leaders,which makes more people quickly informed of relevant risk information.In this process,the information asymmetry problem is alleviated,and newspapers use their position as opinion leaders to unify the public opinion environment in society and attract the attention of households to the relevant information.This paper assumes that there are costs associated with the acquisition of information and that it can be disseminated quickly.Information acquisition by households is costly,and households do not invest a lot of time and effort in collecting and organizing risk information in society,but obtain risk information in a lowcost manner through mass media such as newspapers.Households’ risk beliefs gradually change in the process of continuous information acquisition.Third,this paper uses text analysis methods to extract risk information from newspaper reports and constructs risk reporting indicators.Unlike the previous methods of measuring risk using questionnaires or economic data,this paper first constructs a dictionary of keywords related to "risk" and uses the dictionary method to extract news reports containing relevant keywords from newspaper reports to construct risk reporting indicators.Considering that risk reports with different sentiments may have different effects on household stock investment decisions,this paper differentiates risk report indicators into positive risk reports and negative risk reports.After that,in order to further analyze the role of household stock investment by different types of risk reports,this paper uses unsupervised machine learning to classify all risk reports,extracts the kinds of risks that frequently occur in society,and constructs segmented risk report indicators.Fourth,the main empirical analysis of this paper shows that risky reports show a positive relationship with the probability of household stock investment.Distinguishing the reported sentiment,positive risk reports promote household stock market investment,while negative risk reports discourage stock investment,but the effect is not significant.Further analysis reveals that positive risk reports and negative risk reports affect household stock investment through different channels.Positive risk reports reduce households’ perceptions of stock market risk levels,while negative risk reports mainly change households’ risk attitudes,making them more risk averse,which in turn affects their stock investment strategies.The results of the heterogeneity analysis point out that risk coverage affects households from different sources of investment information,but households with newspapers as their main source of information are more affected by risk coverage.Households with financial knowledge are more rational about risk changes and are less affected by risk reports,suggesting that educating investors about financial literacy can indeed play a role in stabilizing market volatility.Social networks serve as one of the important channels for sharing risks,and when households have richer social networks,even negative risk reports will facilitate household stock investment decisions.Finally,this paper further analyzes the impact of risky reports on household stock investment decisions from two perspectives: the level of risk with different household background risk and different types of risky reports.The findings show that households with different background risks are affected by risk reports almost the same,while it is the difference in the types of risks that really affects household stock investment decisions.Specifically,among the four types of background risks considered,only entrepreneurial households and households with homeownership are significantly affected by negative risk reports versus other households,and the interaction terms for the effects of total risk reports and positive risk reports are not significant.Households with different income levels and households with different health conditions do not show significant differences in their exposure to risk reports.In terms of risk types,both business risk and innovation risk associated with business operations significantly increase the probability of household stock market participation.Housing and education risks related to households’ own lives are both reported to reduce the probability of households’ stock market investment.In contrast,disaster risk reports are not found to have a significant effect on the probability of household stock investment.There are three main contributions and innovations in this paper’s research.In terms of research perspective,risk belief is used as an entry point to empirically test the mechanism by which risk reports affect household stock investment by combining risk reports and household investment behavior.This paper divides household risk beliefs into two levels:risk perceptions,which reflect households’ perceptions of external risk levels,and risk attitudes,which are households’ preferences when facing risks.This paper explores the channels through which risk reports influence households’ stock investment decisions from these two levels of analysis,respectively.In a theoretical model,the channels through which risky reports influence household stock investment are systematically analyzed.Previous analyses in the literature have only been at the empirical level and lack theoretical analysis of risky reports and household stock investment decisions.Specifically,combining the SIR model and sticky information theory,this paper explores the process of information diffusion in risky reports among the population from the process of information dissemination and analyzes how risky reports have influenced households’ risk perceptions.Meanwhile,in the theoretical analysis,the heterogeneous effects of different emotional risk reports and different kinds of risks on households are fully considered,and the influence mechanism of various kinds of risk information on households’ stock market investment is comprehensively analyzed.In terms of indicator measurement,the risk level measurement under a unified framework is constructed based on newspaper reports using textual analysis methods,and household risk perceptions are measured using risk reports.Different from the previous approach of using macro financial indicators and questionnaire surveys,we use textual analysis methods to extract risk information from newspaper reports and construct risk level measures,overcoming the problems of limited scope,survey lag and discontinuity of commonly used risk indicators.Specifically,this paper constructs a dictionary of riskrelated keywords,extracts the reports containing risk keywords using the dictionary method,and constructs an overall risk reporting index.Considering that previous studies have pointed out that reports of positive sentiment and reports of negative sentiment have different effects on individual investment decisions,this paper further classifies risk reports by sentiment and constructs positive risk report indicators and negative risk report indicators,respectively,for empirical analysis.Further,considering the current analysis of risk factors affecting households’ stock market investment decisions shows that household stock investment decisions are not equally influenced by different kinds of risks.In this paper,we use unsupervised machine learning methods to cluster reports according to the internal word structure of newspaper reports by topic to extract the types of risks commonly reported by newspapers and analyze their impact on household stock investment decisions.