The Impact of Legal and Political Institutions on Equity Trading Costs: A Cross-Country Analysis

Authors: Eleswarapu, Venkat R.; Venkataraman, Kumar

Source: Review of Financial Studies, Volume 19, Number 3, 1 2006 , pp. 1081-1111(31)

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Abstract:

We conjecture that macro-level institutions affect equity trading costs through their impact on information risk and investor participation. In a study of trading costs for 412 NYSE-listed American Depository Receipts (ADRs) from 44 countries, we find that, after controlling for firm-level determinants of trading costs, effective spreads and price impact of trades are significantly lower for stocks from countries with better ratings for judicial efficiency, accounting standards, and political stability. Trading costs are significantly higher for stocks from French civil law countries than from common law countries. Overall, we conclude that improvements in legal and political institutions will lower the cost of liquidity in financial markets.

Document Type: Research article

DOI: http://dx.doi.org/10.1093/rfs/hhj026

Publication date: 2006-01-01

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The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.