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

38 Pages Posted: 19 Jun 2005

See all articles by Venkat Eleswarapu

Venkat Eleswarapu

Chicago Equity Partners

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

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We conjecture that macro-level institutions will affect equity trading costs through their impact on information risk and investor participation. The key findings from our study of trading costs for 412 NYSE-listed ADRs from 44 countries are as follows. After controlling for firm-level determinants of trading costs and home country market share, 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. We confirm the robustness of our results in various analyses. Overall, we conclude that improvements in legal and political institutions will lower the cost of liquidity in stock markets.

Keywords: Trading costs, Information risk, Institutional quality, Legal system, ADR

Suggested Citation

Eleswarapu, Venkat R. and Venkataraman, Kumar, The Impact of Legal and Political Institutions on Equity Trading Costs: A Cross-Country Analysis. Review of Financial Studies, Forthcoming. Available at SSRN:

Venkat R. Eleswarapu

Chicago Equity Partners ( email )

United States
312 629 8628 (Phone)

Kumar Venkataraman (Contact Author)

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

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


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