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

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