Transaction Taxes and Financial Market Equilibrium

Journal of Business, Vol. 71 No. 1, January 1998

Posted: 18 Apr 1998

See all articles by Avanidhar Subrahmanyam

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

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Abstract

I explore the effects of trade-size dependent transaction taxes on market liquidity and information acquisition. Transaction taxes cause strategic informed traders to scale back their aggregate trading, which, surprisingly, causes both market liquidity and informed investor profits to decline in the level of the tax. Taxes on trading can reduce rent-seeking behavior when agents engage in a "race" to obtain private information earlier than others. Such taxes also generally reduce (increase) the proportion of agents acquiring short-term (long-term) information and thus can lead to greater firm values.

JEL Classification: G14, G18, H25

Suggested Citation

Subrahmanyam, Avanidhar, Transaction Taxes and Financial Market Equilibrium. Journal of Business, Vol. 71 No. 1, January 1998. Available at SSRN: https://ssrn.com/abstract=55061

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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