The influence of household saving motives on the propensity to save and portfolio allocation

430 Pages·2016·42.5 MB·English

by  Christine Middleton

THE INFLUENCE OF HOUSEHOLD SAVING MOTIVES ON
THE PROPENSITY TO SAVE AND PORTFOLIO ALLOCATION
DECISIONS
NURUL SHAHNAZ AHMAD MAHDZAN, BBA, MBA
Thesis submitted to the University of Nottingham for the
Degree of Doctor of Philosophy
July 2010
ABSTRACT
The objective of this study is to examine the motives that drive the propensity
of households to save and households' portfolio allocation decisions. This
interest has been spurred by the issue of low personal saving rates that has been
observed across the globe over the past two decades. In addition, the
perplexities concerning portfolio allocation choices despite rapid innovations
of financial products warrants the need for further investigation on household's
asset allocation decisions.
Motivated by the above phenomena, this study was conducted with three main
objectives. First, the study sought to identify the factors that are instrumental to
the formation of household's saving motives, by examining households' socio
demographic and behavioural factors that influence their motivations to save.
Second, the study aimed to determine the factors that influence the household's
propensity to save. Third, the study targeted to evaluate the factors that impact
the choice of assets that households save in, by examining their preferences in
regards to low-risk assets, risky assets, and life insurance.
The 2004 U.S. Survey of Consumer Finances (SCF), which a government
sponsored triennial cross-section survey on the financial situation of American
families, was chosen as an empirical basis to address the three research
objectives mentioned above. Various econometric tools were used to analyze
the relationships under investigation.
Results indicate that all categories of saving motives, namely the life-cycle,
precautionary, bequest and profit motives are significant determinants of the
propensity to save. This suggests that planned saving are relevant in the
household's saving decisions. Nonetheless, results also show that unplanned
saving, stemming from the household's capabilities and opportunities to save,
is a stronger determinant of household saving. Saving motivations are also
found to be related to portfolio allocation choice. In particular, life-cycle and
profit motives significantly impinged on the decision to own risky assets, while
life-cycle and bequest motives strongly influenced the probability of owning
life insurance. Meanwhile, results indicate that age and income are salient
factors influencing the household's formation of saving motives, their
propensity to save, and portfolio allocation choices.
ACKNOWLEDGEMENTS
This PhD would not have been possible without the contribution made by a number of
people. First and foremost, my deepest gratitude goes to Professor Dr Stephen Diacon
and Professor Dr James Devlin for their committed supervision and guidance
throughout my PhD tenure. Their continuous encouragement and constructive
feedback have kept me motivated and on track in completing this thesis. They
provided me the direction and support, and imparted to me an abundance of
knowledge, which I would not have gained elsewhere.
I would also like to express appreciation to my external examiner, Prof Dr Robert
Hudson, and my internal examiner, Dr Andrew Smith, for examining this thesis and
for the meaningful discussion regarding my work during the viva voce. I also would
like to thank Mr Mark Billings, who was my assessor during my first year annual
review and Transfer Panel.
This thesis would not have been possible without the love, sacrifice and support
received from my beloved husband, Muhammad Azmil Mahayuddin. He was the
pillar of strength holding me up throughout the entire PhD process, and his sacrifice is
immeasurable. My adorable children, Adani, Addin and Adeela, are also significant
contributors to this success, simply by being my lovely companions at home, and for
being my main source of pride and joy in life.
I am indebted to both my wonderful and beloved parents, Ahmad Mahdzan Ayob and
Noran Fauziah Yaakub, for their consistent concern, support, and prayers. There is no
way I can every repay them for all that they've done, except tor my love and affection
towards them. My sincerest appreciation also goes to my parents-in-law, Mahayuddin
Shafiei and Fatimah Yahaya, for their constant prayers, encouragement, and
continuous reminders to keep my faith.
I would like to thank the Ministry of Higher Education, Malaysia and the University
of Malaya (U.M.), for providing me the sponsorship to undertake this degree. In
particular, I would like to thank Prof. M Fazilah Abdul Samad, Prof. Ainin Sulaiman
and Prof. Md Nor Othman, for their leadership as (current and former) Deans of the
Faculty of Business and Accountancy, U.M. I also appreciate the help provided by
Assoc. Prof. Dr Rubi Ahmad and Izlin Ismail, as the (former and current) Heads of
Finance and Banking Department, U.M.
I truly appreciate the help given by Ms Andrea Tomlinson, as the PhD programme
administrator of the Nottingham University Business School. She is always committed
to ensuring that our needs as a student are being met.
I also need to name several people who have embarked on this journey with me, that
is, Amrul Any and Zarina Zakaria. We have shared so many experiences, joys and
woes together, which I will cherish forever. Many thanks also to Zainal Abidin Md
Yassin and Fatimah Hashim, for their assistance when I first arrived in Nottingham.
They are like family to me and I pray that our bond of friendship last forever. In
addition, I would also like to acknowledge and thank all my family, friends, and
colleagues for helping and supporting me throughout the PhD process.
Lastly but definitely not least, all praise is due to Allah the Almighty and Most
Merciful, for giving me the opportunity, ability and strength to embark on this
extremely remarkable and fulfilling journey of life. Alhamdulillah.
TABLE OF CONTENTS
Page
LIST OF TABLES................................. ............ ..................... .... v
LIST OF FIGURES......... ... ...... .................. ..................... ......... ....
Vll
CHAPTER ONE: INTRODUCTION.............................................. 1
1.1 RESEARCH BACKGROUND............................................................. 1
1.2 RESEARCH OBJECTIVES................ ..... .... .... .... ................ .............. ... 7
1.3 RESEARCH QUESTIONS................................................................... 8
1.4 RESEARCH METHODOLOGy........................................................... 9
1.5 CONTRIBUTION OF THE STUDy.................................................... 10
1.6 THESIS STRUCTURE........ ................. .......... ..... ................. ................. 11
1.7 CONCLUSION...................................................................................... 14
CHAPTER TWO: HOUSEHOLD SAVING BEHAVIOUR, MOTIVES
AND DECISIONS........... ...... ................. ................................... 16
2.1 INTRODUCTION............................................................. 16
2.2 THE ACT OF SAVING.............................. ......................... 17
2.2.1 Definitions..................... ...................................... 17
2.2.2 Patterns in Household Saving... . .. ... ... . .. ... ... . .. ... . .. ... .... 18
2.3 MOTIVES AS AN ANTECEDENT OF BEHAVIOUR............... ... 22
2.3.1 Definition of Motives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.3.2 Motives and Behaviour - a theoretical review...................... 25
i) Theory of Reasoned Action (1975).................... 25
ii) Self Efficacy Theory (1977)..................... ... 27
iii) Theory of Planned Behaviour (1985)............. 28
iv) Model of Goal-directed Behaviour (2001) ...... 28
v) Reasons Theory (1996)...... ............ .............. 31
vi) Behavioural Reasoning Theory (2005)......... ... 32
2.4 WHAT MOTIVATES SAVING?......................................................... 35
2.4.1 Life-cycle Motives..... ..... ...... ...... .... ....... .... ................ ............. 40
2.4.2 Precautionary motive............................................................. 44
i) Measurement issues. .............. ..... .............. ... ...... 47
ii) Empirical Evidence............................................. 49
iii) The importance of precautionary saving............ 53
iv) Summary............................................................. 54
2.4.3 Bequest motive... ... ......... ... ................................. ... 55
i) Unintended / Accidental Bequests................. 56
ii) Intended / Voluntary Bequests... ...... ... ......... 57
iii) Empirical Evidence ................................. 60
iv) Summary............................................................. 63
2.4.4 Profit Motive... ............ ... ... ... ...... ............ ......... ..... 64
2.5 PORTFOLIO ALLOCATION DECISIONS... ... ...... ...... ............. 65
2.5.1 Theoretical issues in the portfolio allocation choice........... 66
i) Modern Portfolio Theory... . .. . . . . .. .. . .. . . . . . . . . . . 66
ii) The portfolio allocation problem .......... ,. ...... 68
iii) Theories of choice under uncertainty... ... ........ 71
iv) Behavioural portfolio theory...... ......... ..... .... 73
2.5.2 Evidence on household's portfolio allocation choices... ...... 77
i) Diversification of portfolios .... ,. ......... .... ........ 77
ii) Stock market participation.......................... 79
2.5.3 Determinants of portfolio choices................................ 81
i) Background risks .................................... 81
ii) Taxes .................................................................. . 82
iii) Transaction costs ................................................ . 83
iv) Life-cycle factors ................................... . 84
v) Other determinants of Asset allocation ........... . 85
2.5.4 Conclusion .......................................................... . 87
2.6 GAPS IN THE LITERATURE .............................................. . 88
. . .?
2.6 1. Wh at d etermmes savmg motives ......................................... .. 88
2.6.2 Overlapping motives - which dominates? ............................ . 89
2.6.3 The link between motives and portfolio allocation .......... .. 90
2.7 CONCLUSION ............................................................... .. 90
CHAPTER THREE: RESEARCH MODEL AND HYPOTHESES .......... . 92
3.1 INTRODUCTION ............................................................ . 93
3.2 PURPOSE OF STUDy ....................................................... . 94
3.3 A MODEL OF SAVING BEHAVIOUR .................................. .. 94
3.3.1 Focus of the study: Saving Motives ............................. . 94
3.3.2 The determinants of saving motives (RQ 1) .................... . 96
3.3.3 The relationship between saving motives and saving
propensity (RQ2) .................................................. . 99
3.3.4 The link between saving motives and portfolio allocation
choice (RQ3) ....................................................... . 101
3.3.5 List of main hypotheses .......................................... .. 103
3.4 CONCLUSION ............................................................... .. 103
CHAPTER FOUR: RESEARCH METHODOLOGy. ............................... . 105
4.1 INTRODUCTION ............................................................................... .. 105
4.2 EPISTEMOLOGY AND PHILOSOPHY OF RESEARCH ................ . 106
4.3 RESEARCH PARADIGM ................................................................... . 110
4.4 PRIMARY VERSUS SECONDARY DATA ...................................... . 113
4.5 DATA SOURCE EVALUATION ........................................................ . 115
4.5.1 British Household Panel Survey (BHPS) ...................... .. 115
4.5.2 English Longitudinal Survey of Aging (ELSA) ............... . 116
4.5.3 Survey of Consumer Finances (SCF) ........................... . 117
4.5.4 Health and Retirement Survey (HRS) .......................... . 118
4.6 SELECTION OF DATASET ................................................ . 118
4.7 THE SURVEY OF CONSUMER FINANCES ................................... .. 121
4.7.1 Overview ............................................................................... . 121
4.7.2 Sample design ........................................................................ . 122
4.7.3 Data collection ....................................................................... . 123
4.7.4 Missing data ........................................................................... . 124
4.7.5 Recommended analytical procedures .................................... . 127
4.7.6 Disclosure protection ............................................................ .. 128
4.7.7 Weighting .............................................................................. . 129
4.7.8 Data quality ........................................................................... . 130
4.8 VARIABLES IN THE S.C.F. OF INTEREST TO THE STUDy ...... . 132
4.8.1 Demographic and behavioural variables ....................... . 132
4.8.2 Income variable ..................................... , ............. .. 134
4.9 DESCRIPTIVE STATISTICS .............................................. .. 137
4.9.1 Descriptive statistics of demographic factors .................. . 137
4.9.2 Descriptive statistics of behavioural factors .................... . 138
4.9.3 Descriptive statistics for income ................................ . 140
4.1 0 ANALYTICAL METHODS ................................................ . 145
4.11 CONCLUSION ..................................................................................... . 147
CHAPTER FIVE: MOTIVES FOR SA VING ............................................. . 149
11
5.1 INTRODUCTION ............................................................ . 149
5.2 SAVING MOTNES: RESEARCH ISSUES .............................. . 150
5.3 MEASUREMENT OF VARIABLES ....................................... . 152
5.3.1 Dependent Variable: Saving Motives ........................... . 152
5.3.2 Independent variables ............................................. . 158
5.4 DETERMINANTS OF SAVING MOTNES ............................ . 162
5.4.1 Life-cycle Motive (LC) ........................................... . 163
5.4.2 Precautionary Motive ............................................ . 167
5.4.3 Bequest Motive ..................................................... . 171
5.4.4 Profit Motive ......................................................... 175
5.5 ANALYSES OF DESCRIPTIVE STATISTICS .......................... . 179
5.6 UNNA RIAT E ANALySES ................................................ . 181
5.6.1 Two-sample tests of proportions ................................ . 181
5.6.2 ANOV A and Kruskal-wallis tests ............................... . 185
5.7 MODEL SPECIFICATION OF MULTIVARIATE ANALySES ..... . 189
5.7.1 Logit Regressions ........................... '" ...... '" ......... '" 190
5.7.2 Multinomial Logit Regressions .................................. . 191
5.8 RESULTS OF MULTNARIATE ANALySES .......................... . 193
5.8.1 Determinants of saving motives ................................. . 193
i) Life-Cycle Motive ................................... . 194
ii) Precautionary Motive ............................... . 198
iii) Bequest Motive ...................................... . 201
iv) Profit Motive ......................................... . 204
5.8.2 Determinants of precautionary, bequest and profit motives
vis-a-vis life-cycle ................................... " ........... . 206
5.9 DISCUSSION OF RESULTS .............................................. . 210
5.10 CONCLUSION ................................................................ . 218
CHAPTER SIX: THE PROPENSITY TO SAV E .......•.......•.•....................... 220
6.1 INTRODUCTION ............................................................................... . 220
6.2 HOUSEHOLD SAVING BEHAVIOUR: RESEARCH ISSUES ...... . 221
6.3 CONCEPTUALIZATION OF THE RESEARCH QUESTION .......... . 225
6.3.1 The link between saving motives and the propensity to save
(RQ2a) ................................................................................... . 227
6.3.2 The link between household characteristics and the
propensity to save .................................................. . 228
1) Demand-side capability to save .............................. . 229
2) Supply-side opportunities to save .............................. . 230
6.4 MEASUREMENT OF V ARIABLES ................................................... . 232
6.4.1 Dependent Variables: The propensity to save .................. . 233
6.4.2 Independent Variables - predicted signs of relationships ..... . 235
6.5 DETERMINANTS OF THE PROPENSITY TO SAVE ................. . 236
6.5.1 Household characteristics ......................................... . 237
6.5.2 Saving motives ..................................................... . 243
6.6 ANALYSES OF DESCRIPTNE STATISTICS .................................. . 245
6.7 UNNA RIA TE ANALY SIS ................................................................. . 249
6.8 MODEL SPECIFICATION: ORDERED LOGIT REGRESSION ..... . 255
6.9 RESUL TS OF MULT N ARIA TE ANALY SIS ................................... . 257
6.9.1 The propensity to save for the overall sample .................. . 257
6.9.2 The propensity to save amongst households of different
I. ncome quar tI'l es ........................................................ . 262
1) Quartile 1. ........................................................ .. 263
2) Quartile 2 ........................................................ . 265
3) Quartile 3 .......................................... '" ............ . 266
4) Quartile 4 ........................................................ . 267
1ll
6.10 DISCUSSION.................................................................................. 269
6.11 CONCLUSION...................................................................................... 275
CHAPTER SEVEN: PORTFOLIO ALLOCATION CHOICE.................. 277
7.1 INTRODUCTION............................................................. 277
7.2 THE PORTFOLIO ALLOCATION DECISION.......................... 278
7.2.1 Research Issues........................... ............................ 278
7.2.2 The link between saving motives and portfolio allocation
choice... ... ... ... ... ... ... ... ... ...... ...... ............. ............... 280
7.3 MEASUREMENT OF PORTFOLIO ALLOCATION CHOICE....... 283
7.3.1 Categorization of financial assets............................. .... 284
7.3.2 Measurement of asset categories... ... ... ... ... ...... ......... ... 289
7.4 ANALYSES OF DESCRIPTIVE STATISTICS........................... 292
7.5 DETERMINANTS OF PORTFOLIO ALLOCATION CHOICE
(HYPOTHESES) .............................................................. 295
7.5.1 Saving Motives...... ...... ... ... ......... ... ...... ... ... ... ..... .... 296
7.5.2 Demographic and Behavioural Factors... ............. .......... 299
7.6 UNIVARIATE ANALYSES................................................. 309
7.6.1 Univariate tests on low-risk assets, risky assets and life
Insurance............................................... .............. 309
7.6.2 Univariate tests on the percentage amounts allocated in
each asset category. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... 3 13
7.7 MODEL SPECIFICATION OF MULTIVARIATE ANALySES...... 320
7.8 RESULTS OF MULTIVARIATE TESTS................................. 323
7.8.1 Probability of holdings in different asset classes............... 323
7.8.2 Investigating the non-linear relationship between age and
asset choice.......................................................... 334
7.8.3 Determinants of the value of asset holdings..................... 338
7.9 DISCUSSION OF RESULTS............................................. .... 348
7.10 CONCLUSION................................................................. 355
CHAPTER EIGHT: SUMMARY OF FINDINGS, IMPLICATIONS
AND CONCLUSION....................................................................................... 360
8.1 SUMMARy..................................................................... 360
8.1.1 Research issues.................................................. .... 360
8.1.2 Research objectives................................................ 361
8.1.3 Research methodology...... ...... ......... ......... ...... ......... 362
8.1.4 Theoretical background............................................ 362
8.2 RESULTS SUMMARy....................................................... 364
8.2.1 Determinants of saving motives.................................. 364
8.2.2 Determinants of the propensity to save.......................... 366
8.2.3 Determinants of portfolio allocation choice...... ... ...... ...... 369
8.3 DISCUSSION AND IMPLICATIONS...................................... 373
8.4 CONTRIBUTION OF THE STUDy........................................ 381
8.5 LIMITATIONS OF THE STUDY AND RECOMMENDATIONS
FOR FUTURE RESEARCH..................................... ......... .... 383
REFERENCES........................................................................................ 385
APPENDIX ............................................................................................. . 413
IV
LIST OF TABLES
Table Page
3.1 Main hypotheses of the study .............................................. 103
4.1 Research paradigms ............................................................ 110
4.2 List of variables in the SCF relevant to the study and the
corresponding questions asked in the survey ...................... 133
4.3 Components of income included in the SCF ....................... 136
4.4 Descriptive statistics of demographic factors (continuous
variables) ............................................................................. 137
4.5 Descriptive statistics of demographic factors (categorical
variables) ............................................................................. 138
4.6 Descriptive statistics of behavioural factors
(categorical variables) ........................................... 139
4.7 Summary of statistics for income variables ........................ 140
4.8 Breakdown of households with positive and non-positive
values of income ................................................................. 141
4.9 Descriptive statistics of individual components of 141
Income .............................................................
4.10 Detailed summary of income variables ............................... 142
4.11 Brief description of the measurement of dependent
variables and analytical methods ........................................ 147
5.1 Categorization of saving motives from the 2004 SCF 157
dataset. .................................................................................
5.2 Independent variables and predicted signs of relationship
with the probabilities of having life-cycle, precautionary,
bequest and profit motives .................................................. 179
5.3 Univariate tests of proportions on the life-cycle,
precautionary, bequest and profit motives (using 182
Implicate 1) .........................................................................
5.5 Logit Regression on the Life-cycle Motive ........................ 194
5.6 Logit Regression on the Life-cycle Motive (with Age!\2) .. 195
5.7 Logit Regression on the Precautionary Motive ................... 199
5.8 Logit Regression on the Bequest Motive ............................ 202
5.9 Logistic Regression on the Profit Motive ........................... 204
5.10 Multinomial Logit Regression ............................................ 209
5.11 Profile of savers according to saving motives ..................... 217
6.1 Expected signs of relationships between
SVGPROPENSITY and explanatory variables .................. 244
6.2 Saving propensity according to saving motives .................. 246
6.3 Saving propensity according to gender and marital status .. 247
6.4 Saving propensity according to age groups ........................ 248
6.5 Saving propensity according to employment and race 248
categories .............................................................................
6.6a Results of univariate tests (1) .............................................. 251
6.6b Results of univariate tests (2) .............................................. 252
6.7 Ordered Logit Regression on SVG PROPENSITY for
the total sample ................................................................... 258
6.8 Ordered Logit Regression on SVGPROPENSITY
v
(Quartile 1) .............................................................. . 263
6.9 Ordered Logit Regression on SVGPROPENSITY
(Quartile 2) .............................................................. . 265
6.10 Ordered Logit Regression on SVGPROPENSITY
(Quartile 3) .............................................................. . 266
6.11 Ordered Logit Regression on SVGPROPENSITY
(Quartile 4) .............................................................. . 268
7.1 Categories of assets employed by previous researchers .... . 285
7.2 Mean annual returns and standard deviations for five
asset classes ........................................................................ . 287
7.3 Composition of asset classes and corresponding SCF
variable codes .................................................... . 290
7.4 Descriptive statistics of Asset Holdings ...................... . 293
7.5 Predicted signs of relationships between independent and
dependent variables ............................................................ . 308
7.6 AN OVA tests on low-risk assets, risky assets and
insurance (dollar amounts) ..................................... . 310
7.7 ANOVA tests on the percentage invested in low-risk
assets, risky assets and life insurance ......................... . 315
7.8 Results of the Triprobit Regression on
POSITV_ LOWRISK, POSITV_ RISKY and 324
POSITV INSURANCE ........................................ .
7.9 Triprobit regression on POSITV_ LOWRISK,
POSITV_ RISKY & POSITVE_INSURANCE (with 336
AGEJ\2) .............................................................................. .
7.10 Tobit regressions on log_LOWRISK, log_RISKY and
log_I NSURANCE .............................................................. . 339
7.11 Tobit regressions on log_LOWRISK, log_RISKY and
log_INSURANCE (with AgeJ\2) ....................................... . 358
APPENDIX TABLES
Al Tobit regressions on financial asset categories for
households in the first income quartile .............................. . 413
A2 Tobit regressions on financial asset categories for
households in the second income quartile .......................... . 414
A3 Tobit regressions on financial asset categories for
households in the third income quartile ............................. . 415
A4 Tobit regressions on financial asset categories for
households in the fourth income quartile ........................... . 416
417
A5 Asset Definitions ................................................ .
\,1
LIST OF FIGURES
Figure
Page
1.1 Brief conceptualisation of the research framework ............... . 9
2.1 Theory of Reasoned Action ....................................... . 26
2.2 The Model of Goal-directed Behaviour ....................... . 29
2.3 Behavioural Reasoning Theory ................................. . 33
2.4 The Life-cycle Hypothesis ...................................... . 41
2.5 The Portfolio Pyramid ............................................ . 75
3.1 Conceptualisation of research ..................................... . 96
4.1 Knowledge claims, strategies of inquiry, and methods
leading to approaches and the design process ....................... . 107
4.2 Research Framework and variables of interest in the study .. . III
4.3 Histogram ofCTOTINC (Cube root of total income) ........ . 143
4.4 HISTOGRAM OF 10g_TOTINC (log of total income) ...... . 144
4.5 Histogram of CINCOME (cube root of INCOME) ........... . 144
4.6 Histogram of log_INCOME using Implicate 1 ................ . 145
5.1 Postulated relationship between antecedents and saving 152
motives .............................................................. .
5.2 Breakdown of first-mentioned saving motive reported by
households in the 2004 SCF .............................................. . 180
6.2 Breakdown of sample according to their propensities to 245
save .................................................................. .
6.5 Saving Propensity by Saving Motives .......................... . 255
7.1 Illustration of the Behavioural Portfolio Theory &
postulated link between saving motives and portfolio choice 278
7.2 Postulated relationship between antecedents of saving and
portfolio allocation choice ..................................................... . 279
7.3 Distribution of 10g_LOWRISK .................................. . 291
7.4 Distribution of log_RISKY ...................................... . 292
7.5 Distribution of log_INSURANCE .............................. . 292
..
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