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Securities Transaction Taxes and Market Quality

Published online by Cambridge University Press:  14 February 2018

Anna Pomeranets  and
Daniel G. Weaver
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Abstract

We study changes in market quality associated with 9 modifications to the New York State securities transaction tax (STT) between 1932 and 1981 and 3 changes to the federal STT between 1932 and 1966. We find that when there is an increase in the level of an STT, individual stock volatility increases, bid–ask spreads widen, price impacts are greater, and volume decreases. We examine the propensity of traders to switch trading locations to avoid the tax and find mixed evidence that they will change locations. Overall, our findings support the notion that the imposition of or increases in an STT harm market quality.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 1 , February 2018 , pp. 455 - 484
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank an anonymous referee, Yakov Amihud, Amber Anand, Hendrik Bessembinder (the editor), Corey Garriott, Sermin Gungor, Nikolaus Hautsch, Scott Hendry, Charles Jones, Andrew Karolyi, Simi Kedia, Teodora Paligorova, Oded Palmon, Joshua Slive, Aron Veress, Gwendolyn Webb, Jonathan Witmer, Xing Zhou, and conference participants at the 2012 Erasmus Liquidity Conference and the 2012 Groupement de Recherche Européen (GdRE) Annual Symposium on Money, Banking and Finance for helpful comments on earlier versions of this study. We thank the Whitcomb Center for Research in Financial Services for research support. This is an updated version of the Bank of Canada Working Paper 2011–26.

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