Execution Costs and Investment Performance: An Empirical Analysis of Institutional Equity Trades

Rodney L. White Center Working Paper No. 26-94

Posted: 14 May 1998

See all articles by Donald B. Keim

Donald B. Keim

University of Pennsylvania - Wharton School

Ananth Madhavan

BlackRock, Inc.

Abstract

We examine the magnitude and determinants of execution costs associated with institutional equity trades and their effect on investment performance. Using detailed information on over $83 billion of recent equity transactions by 21 institutions, we analyze the major components of execution costs, including explicit and implicit costs. We find that execution costs are significantly related to trade size, exchange listing, and the traded stock's market capitalization. We also find that buyer-initiated trades are more costly than equivalent seller-initiated trades. Our results indicate that execution costs have a significant effect on performance over short horizons, and there is significant variation in trading costs and performance across institutions, reflecting differences in trading ability and style. The results provide a way to assess various trading strategies and to form benchmarks to evaluate portfolio managers.

JEL Classification: G23

Suggested Citation

Keim, Donald B. and Madhavan, Ananth, Execution Costs and Investment Performance: An Empirical Analysis of Institutional Equity Trades. Rodney L. White Center Working Paper No. 26-94. Available at SSRN: https://ssrn.com/abstract=5846

Donald B. Keim (Contact Author)

University of Pennsylvania - Wharton School ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7685 (Phone)
215-898-6200 (Fax)

Ananth Madhavan

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

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