Eleswarapu And Venkataraman-The Impact Of Legal And Political Institutions On Equity Trading Cost

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Eleswarapu And Venkataraman-The Impact Of Legal And Political Institutions On Equity Trading Cost

We examine whether the quality of legal and political institutions impact the trading costs of stocks originating from a country. A study of liquidity costs of 412 NYSE-listed ADRs from 44 different countries reveals a number of interesting findings: The average trading costs aresignificantly higher for stocks from civil law (French-origin) countries than for stocks from common law (English-origin) countries. After controlling for firm-level determinants of tradingcosts, effective spreads and price impact of trades are significantly lower for stocks from countries with (i) more efficient judicial systems, (ii) better accounting standards, and (iii) more stable political systems. These empirical relationships are economically very significant. Surprisingly, in the presence of firm-level controls, the enforcement of insider trading does not explain trading costs. Overall, we document that macro-level institutional risk is an important determinant of equity trading costs.

 

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