Articlehybrid1998

The Effects of Transaction Costs on Stock Prices and Trading Volume

Michael J. Barclay · Eugene Kandel · Leslie M. Marx

77 citations0/0 files storedJournal of Financial Intermediation

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

We study the effects of changes in bid–ask spreads on the prices and trading volumes of stocks that move from Nasdaq to the NYSE or Amex and stocks that move from Amex to Nasdaq. When stocks move from Nasdaq to an exchange, their spreads typically decrease, but the reduction in spreads is larger when Nasdaq market makers avoid odd-eighth quotes. When stocks move from Amex to Nasdaq, their spreads typically increase, but again, the increase is larger when Nasdaq market makers avoid odd eighths. We use this data to isolate the effects of transaction costs on trading volume and expected returns. We find that higher transaction costs significantly reduce trading volume, but do not have a significant effect on prices.Journal of Economic LiteratureClassification Numbers: G10, G14.

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References

1986Asset pricing and the bid-ask spread 1998Alternative factor specifications, security characteristics, and the cross-section of expected stock returns1We are especially grateful to Eugene Fama (a referee), an anonymous referee and Bill Schwert (the editor) for insightful and constructive suggestions. We also thank Wayne Ferson, Ken French, Will Goetzmann, Craig Holden, Ravi Jagannathan, Bob Jennings, Bruce Lehmann, Josef Lakonishok, Richard Roll, participants at the 1997 Meetings of the Western Finance Association, the 1997 UCLA/USC/UC Irvine conference, the November 1997 Asset Pricing Meeting of the National Bureau of Economic Research, the Atlanta Forum, and seminars at Columbia, Indiana, Florida, New York, Tulane, and Yale Universities; Eugene Fama and Ken French for providing part of the data used in this study; and Christoph Schenzler for excellent programming assistance. The second author acknowledges support from the Dean's Fund for Research and the Financial Markets Research Center at Vanderbilt University. We are responsible for remaining errors. This paper was formerly titled `A Re-Examination of Security Return Anomalies'.1 1986Capital Market Equilibrium with Transaction Costs 1994Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?2010Evaluating the effects of incomplete markets on risk sharing nad asset pricing 1998Transaction Costs and Asset Prices: A Dynamic Equilibrium model 1994The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings 1994Market Structures and Liquidity: A Transactions Data Study of Exchange Listings

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