Financial capability and investment management of Chinese households: An application of hybrid item response theory

• Published date: 01 December 2021
• Author: Tsun‐Feng Chiang
• Date: 01 December 2021
• DOI: http://doi.org/10.1111/joca.12319

SPECIAL ISSUE

Financial capability and investment

management of Chinese households: An

application of hybrid item response theory

Tsun-Feng Chiang

School of Economics/Center for Financial

Development and Stability, Henan

University, Kaifeng, China

Correspondence

Tsun-Feng Chiang, School of Economics/

Center for Financial Development and

Stability, Henan University, Kaifeng,

China.

Email: tchiang@ncsu.edu

Abstract

This study estimates Chinese individuals' financial capa-

bility and analyzes the association between financial

capability and household investment management. By

applying a novel hybrid item response theory to data

from the China Family Panel Studies, this study finds

that more than 70% of Chinese individuals have financial

capability around the average level, and less than 12% of

individuals have financial capability far below the aver-

age. For two of the components of financial capab ility,

desirable behaviors and perceived financial knowledge,

however, more than half of Chinese individuals are

below the average. The primary finding on whether

financial capability predicts investment management is

that individuals with higher financial capability are more

likely to take control of household investment alone than

to share investment decisions with spouses.

KEYWORDS

China family panel studies, financial capability, item response

theory

1|INTRODUCTION

As the Chinese economy transitions from a centralized system to a market-oriented system, the

government is employing a series of reforms with strong influence. Compared with the period

before the economic reform, when the government or enterprises took care of people's lives,

Received: 28 September 2019 Revised: 13 May 2020 Accepted: 30 May 2020

DOI: 10.1111/joca.12319

Copyright 2020 by The American Council on Consumer Interests

1442 J Consum Aff. 2021;55:1442–1463.wileyonlinelibrary.com/journal/joca

currently, Chinese people have to take more responsibility for their own well-being. Pension

reform has shifted the plan from pay-as-you-go to a defined contribution. In addition, the rising

burden of education and health has fallen on individuals, stimulating people to save more

(Chamon and Prasad, 2010; Chamon et al., 2013). However, people have greater opportunities to

promote their own benefits. In addition to a social-pooling pension plan, people can also invest

their individual savings in financial markets. The financial market reform provides various choices

for individual investors. For example, stock exchanges, mutual funds, and bonds were introduced

in the 1990s, and the first index future was launch in 2010. Under dynamic economic develop-

ment, personal financial competency for the Chinese is more important than ever, allowing them

to pursue financial well-being, particularly for individuals in charge of household investment.

The purpose of this study is to evaluate Chinese individuals' financial capability by an index that

summarizes a set of individual-level competencies for financial issues. Similar to Jappelli (2010),

who showed that people in countries with more generous social security systems are less financially

literate, Chinese individuals are expected to develop better financial literacy given the current lack

of social security networks. The Organization for Economic Co-operation and Development's Pro-

gram for International Student Assessment partially confirms that Chinese youth have a good

understanding of financial issues.

1

However, such studies as Allgood and Walstad (2016) and Hung

et al. (2009b) emphasize that taking action is important in making financial decisions. Financial

capability is a concept that combines financial knowledge and financial behaviors to describe a per-

son's overall financial competency. In addition to measuring financial capability, this study also

evaluates each component of financial capability and identifies the weakness in some components

for future improvement. This study contributes to the literature by applying a novel hybrid item

response theory (IRT), which is adaptive to various types of survey questions, to estimate financial

capability. To the best of our knowledge, this study is the first to estimate Chinese individuals'

financial capability. Furthermore, this study connects specialization in household tasks with house-

hold financial management. Since specialization can promote household utility (Becker, 1991;

Lundberg and Pollak, 2007), this study estimates whether Chinese individuals with better financial

capability in married households are more likely to control investment. The primary findings of this

study are twofold. First, Chinese individuals perform relatively well in overall financial capability

and objective financial knowledge, but more than half of individuals do not exercise desirable finan-

cial behaviors. Second, in married households, financially capable individuals tend to manage

household investment alone rather than share investment duties with their spouses. This finding

shows that Chinese households have a promising chance of achieving financial well-being.

The rest of this paper is divided into five sections. Section 2 reviews the literature on finan-

cial capability and household financial management. Section 3 introduces the hybrid IRT and

Chinese household data, and presents the estimation results for Chinese individuals' financial

capability. Section 4 presents an empirical analysis of the associations between financial capa-

bility and individual characteristics and of who manages household investment. Section 5 dis-

cusses the findings and concludes.

2|LITERATURE REVIEW

2.1 |Financial capability and measurement

The term “financial capability”and the approach to measuring it were first proposed by

Atkinson et al. (2007). Although the authors did not provide a clear definition of financial

CHIANG 1443