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Suitability Checks and Household Investments in Structured Products

Published online by Cambridge University Press:  04 August 2015

Eric C. Chang ,
Dragon Yongjun Tang  and
Miao Ben Zhang
Eric C. Chang
Affiliation:
[email protected], University of Hong Kong, Faculty of Business and Economics, Hong Kong
Dragon Yongjun Tang*
Affiliation:
[email protected], University of Hong Kong, School of Economics and Finance, Hong Kong
Miao Ben Zhang
Affiliation:
[email protected], University of Texas at Austin, McCombs School of Business, Austin, TX 78712.
*
*Corresponding author: [email protected]
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Abstract

The suitability of complex financial products for household investors is an important issue in light of consumer financial protection. The U.S. Dodd–Frank Act, for instance, mandates that distributors check suitability when selling structured products to retail investors. However, little empirical evidence exists on such transactions. Using data from Hong Kong, we find that investors purchase 8% more structured products, on average, when the suitability is not checked. The effect of suitability checks is more pronounced for less financially literate investors. Moreover, investors tend to buy products with lower risk-adjusted returns when product suitability is not checked.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 597 - 622
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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