The Road to Stock Market Participation

Abstract

This paper examines how infrastructure development affects stock market participation in India using trading data from more than 13 million individuals. Using the phased rollout of a national road construction program as a natural experiment, we find that new road connections lead to significant increases in both trading activity and the number of investors. These effects are driven primarily by new market entrants and are most pronounced in rural and intermediately developed regions as well as among male and middle-aged investors. Two main mechanisms explain these patterns. First is an information channel: improved connectivity reduces information frictions, facilitates portfolio diversification, and encourages investment in geographically distant firms. Second is a financial inclusion channel: road construction spurs new bank branch openings—especially by state-owned banks—expanding access to financial services and enabling portfolio reallocation from savings and consumption to equity markets. We find limited evidence for a third possible channel, risk sharing, whereby participation rises with road connectivity in regions with high income volatility. Whereas initial investor returns are positive, long-term performance declines and risk-taking increases, suggesting that infrastructure expansion promotes market participation but not necessarily optimal investment outcomes. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.04496 .

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