Stock market transaction costs and economic growth
Evans, Gregory Richard
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Previous attempts to determine stock markets' contribution to economic growth have measured stock market development by stock market size and activity. But stock market size and activity are poor proxies of stock market development that lead to simultaneity and omitted variable problems and unclear policy prescriptions. By looking at the efficiency of stock markets, specifically how inexpensive it is to transact on, obtain information from, and enforce contracts through them, the simultaneity and omitted variable problems can be overcome and better policy prescriptions can be determined. To look at these costs, a measure of transaction costs across different countries is needed. I estimate the cost of transacting on 95 exchanges in 74 countries using an approach suggested by Lesmond, Ogden, and Trzcinka (1999). I use these estimates, and determinants of information and contract enforcement costs, to supplant the proxy measures of stock market development used in previous models of stock market development and economic growth. Though tepid, the results provide some support for previous findings of a positive link between stock markets and economic growth and suggest that reducing transaction costs is the most important cost reduced by stock markets. Including the efficiency of stock markets in our understanding of stock market development sheds more light on stock market policies and paves the way for additional research. The results suggest that additional taxation of stock markets, through a securities transaction tax and possibly capital gains taxes, would decrease economic growth. Based on the estimated effects produced here, a 0.5% roundtrip tax on stock trades would be expected to decrease current economic growth by $5 to $17 billion a year.