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RFS Advance Access published online on May 11, 2006
Review of Financial Studies, doi:10.1093/rfs/hhj026
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Article

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

Venkat R. Eleswarapu 1 and Kumar Venkataraman 2 *
1 Oppenheimer Funds
2 Southern Methodist University

* To whom correspondence should be addressed.
Kumar Venkataraman, E-mail: kumar{at}mail.cox.smu.edu


  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 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.

Keywords: Trading costs; Information risk; Institutional quality; Legal systems; ADR.
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