Do peer effects in stock market participation enhance household portfolio efficiency? Evidence from China

While existing studies have confirmed the presence of peer effects in stock market participation, there remains debate over whether these effects enhance household investment performance. Based on data from the 2013-2021 China Household Finance Survey, we find that higher peer stock-holding rates and proportions within a community significantly reduce household portfolio efficiency. This negative impact is more pronounced among households with lower cognitive ability or in regions with underdeveloped digital finance and stronger clan culture. We identify misleading strategy diffusion, improper imitation, and excessive risk-taking arising from social interactions as key mechanisms driving this decline. Furthermore, we quantify the negative externalities of peer effects and find that they reduce household financial asset income and suppress both household and social consumption. These findings advance the understanding of the economic consequences of peer effects and indentify potential pathways to mitigate these negative externalities.