Trading Costs and Return Volatility : Evidence from Exchange Listings

Bid-ask spreads and return volatility decline substantially following Exchange listing for firms that moved from Nasdaq to the NYSE during 1996 and 1997, with the largest reductions in volatility for firms with the largest reductions in spreads. This finding is inconsistent with the reasoning that volatility can be reduced by increasing trading costs, e.g. by imposing a transactions tax. Return volatility declines after Exchange listing even when bid-ask bounce and changes in overall market volatility are allowed for, suggesting that return volatility depends on market structure. Consistent with the results reported by Barclay (1997) for an earlier sample, but somewhat surprising in light of recent market reforms, the largest spread reductions occur for firms where Nasdaq liquidity providers make little use of odd-eighth quotations. Firms subject to the new Nasdaq order-handling rules experience less dramatic decreases in spreads after Exchange listing