NEW YORK – Investors routinely follow the practice of separating personal spending and consumption from their stock portfolios, summarized on film by Wall Street’s Gordon Gekko: “First rule of business is never get emotional about stock.” But as younger, less experienced, and increasingly tech-savvy investors join the market using new platforms like Robinhood, many are supporting their favored companies on the stock market. According to new research from Columbia Business School, this approach is part of a pattern – new data shows that investors actually increase their spending at those brands of which they own stock.
“Our study is the first to show a very clean, causal link between stock ownership and consumption,” said Michaela Pagel, the Roderick H. Cushman Associate Professor of Business at Columbia Business School. “It’s not only that loyalty matters in people’s investment decisions, but we show one step further that loyalty actually affects consumption of the very brands people are investing in.”
In the study, The Effect of Stock Ownership on Individual Spending and Loyalty, Pagel and co-authors Texas A&M University Professor Paolina C. Medina and Columbia Business School Finance Ph.D. candidate Vrinda Mittal, used transaction-level data from Bumped, a FinTech app that opens a brokerage account for its users and rewards them with stocks from the brands and stores they first select and then buy from. The researchers found that weekly spending at the selected brands jumped by 40% after people received their brokerage accounts – an average of $23 per week. The researchers also studied a stock grant program from Bumped that provided users $5 or $10 stock grants from the following companies: Red Robin, Taco Bell, McDonald’s, ExxonMobil, Chevron and Yum! Brands. The researchers found that, when users are granted with a certain company’s stock, their weekly spending at those brands increases by 100%.
In terms of the psychological mechanisms at play, the study concludes that familiarity and loyalty heavily influence stockholders spending decisions. Specifically, through survey evidence and data on transfers to brokerage accounts, loyalty appears to be the dominant psychological driver to spending.
“As we’re seeing with Robinhood, investors putting a lot of leverage in certain stocks, investing is not just about maximizing your returns, but people’s preferences play a role,” said Pagel. “People buy brands they care about and we find that there’s a direct link between spending and stock holdings.”
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
About the researcher
Michaela Pagel is the Roderick H. Cushman Associate Professor of Business at Columbia Business School. She received her Ph.D. from the Economics...Read more.