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

Posted: 29 Feb 2008

See all articles by Venkat Eleswarapu

Venkat Eleswarapu

Chicago Equity Partners

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Multiple version iconThere are 3 versions of this paper

Date Written: 2006

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.

Suggested Citation

Eleswarapu, Venkat R. and Venkataraman, Kumar, The Impact of Legal and Political Institutions on Equity Trading Costs: A Cross-Country Analysis ( 2006). The Review of Financial Studies, Vol. 19, Issue 3, pp. 1081-1111, 2006. Available at SSRN: https://ssrn.com/abstract=1096002 or http://dx.doi.org/10.1093/rfs/hhj026

Venkat R. Eleswarapu (Contact Author)

Chicago Equity Partners ( email )

United States
312 629 8628 (Phone)

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

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