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 American Depository Receipts (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. Copyright 2006, Oxford University Press.
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Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.