Determinants of Transactions Costs in the Brazilian Stock Market
| Autor | Antonio Zoratto Sanvicente |
| Cargo | Insper Instituto de Ensino e Pesquisa, Sao Paulo, SP - Brasil |
Determinants of Transactions Costs in the
Brazilian Stock Market
(Determinantes dos Custos de Transac¸˜
ao no Mercado de Ac¸ ˜
oes no Brasil)
Antonio Zoratto Sanvicente*
Abstract
The Lesmond (2005) method for estimating transactions costs, based on a limited-depen-
dent variable model, is used in order to test for the significance of plausible explanations
for cross sectional cost differences. Variables such as liquidity, volatility, firm size, quality
of corporate governance and participation in ADR programs are considered, in addition to
the possible impact of the 2008 crisis. Daily data for 1999-2009 are used, covering at least
250 securities each year. The average total transaction cost declined from 2.95% in 1999 to
1.22% in 2009. Stock volatility and quality of corporate governance appear to be the most
relevant factors associated with the measure of transactions cost.
Keywords:transactions cost; information asymmetry; stock trading; operational efficiency;
limited dependent variables.
JEL codes: C24; C33; D82; G19.
Resumo
Este artigo aplica a estimativa de custos de transac¸˜ao de Lesmond (2005) no mercado
brasileiro de ac¸ ˜oes, apoiada num modelo de vari´avel dependente limitada. O objetivo ´e
testar hip´oteses sobre fatores determinantes dos custos de transac¸˜ao no mercado secund´ario
(liquidez, volatilidade, tamanho, governanc¸a corporativa diferenciada, participac¸˜ao em pro-
grama de ADRs), bem como o impacto da crise de 2008. Utilizam-se dados di´arios do
per´ıodo de 1999 a 2009, em m´edia com mais de 250 ac¸ ˜oes por ano. ´
E observado que o
custo total m´edio de transac¸˜ao sofreu reduc¸ ˜ao substancial e continuada em cada ano do
per´ıodo, indo de 2,95% em 1999 a 1,22% em 2009. ´
E verificado que a volatilidade da
ac¸ ˜ao e a participac¸ ˜ao em n´ıveis de governanc¸ a corporativa diferenciada s˜ao as vari´aveis
explicativas mais importantes.
Palavras-chave:custo de transac¸˜ao; assimetria de informac¸ ˜ao; negociac¸ ˜ao de ac¸˜oes; efici-
ˆencia operacional; vari´aveis dependentes limitadas.
Submitted 5 July 2011. Reformulated 27 December de 2011. Accepted 9 February 2012. Pub-
lished on-line 25 June 2012. The article was double blind refereed and evaluated by the editor. Super-
vising editor: Newton Costa Jr. Partial or total reproduction and derivative works permitted with the
proper source citation.
*Insper Instituto de Ensino e Pesquisa, S˜ao Paulo, SP,Brasil. E-mail: sanvic@insper.edu.br
Rev.Bras. Financ¸ as, Rio de Janeiro, Vol. 10, No. 2, June 2012, pp. 179–196
ISSN16 79-0731, ISSN online 1984-5146
c
2012Sociedade Brasileira de Financ¸as,under a Creative Commons Attribution 3.0 license - http://creativecommons.org/licenses/by/3.0
Sanvicente, A.
1. Introduction
In contrast with the assumption of perfect capital markets, the trading of finan-
cial assets in secondary markets takes place at a variety of costs, generically called
“transactions costs”. In turn, the level and the behavior of transactions costs may
be seen as indicators of a market’s overall degree of efficiency,both in opera tional
and informational terms.
Concerning operating efficiency, one acknowledges the presence of costs we
might call explicit; for example, these include the expenses directly charged by
brokers (brokerage fees) and the stock exchange itself (exchange fees), any rigidi-
ties caused by the processing of order flow, including trading hours, and even
taxes, especially those on trading volumes, such as the Tax on Financial Transac-
tions (IOF) and the Contribution on Financial Transactions (CPMF).
In terms of informational efficiency, the most important obstacle to the free
trading of financial assets is the possible asymmetry of information between the
buyer and the seller of particular asset. Since th etr ansactions costs resulting from
information asymmetries are not directly observable, we might characterize them
as implicit costs. These result in the over-pricing or the under-pricing of securi-
ties. In the former case, a seller demands a premium for trading with a buyer with
potentially superior and favorable information. In the latter, the buyer requires a
discount for trading with a seller with potentially superior and negative informa-
tion.
It is reasonable to expect, therefore, that the greater the efficiency with which
information is impounded in market prices, the lower would these costs be. Hence,
their magnitude may be an important indicator of a market’s informational effi-
ciency. Another potential effect of trading itself on prices, leading them away
from true values, is Hasbrouck’s (1991) “market impact” effect, also attributed
by that author as a permanent effect due to the information contained in security
trades.
This article’s objective, of an essentially empirical nature, is to provide an as-
sessment of total transactions costs in the Brazilian stock market, starting from
the adverse selection argument proposed and developed in Glosten & Milgrom
(1985), and using the methodology developed and applied by Lesmond et al.
(1999) (heretofore referred to as LOT) to estimate the resulting transactions costs.
More specifically, this article presents results from measuring total transactions
costs, for individual stocks traded in Brazil in the 1999-2009 period, and the anal-
ysis of how such costs are related to individual security and firm characteristics,
such as stock liquidity and volatility, the issuer’s level of corporate governance,
and the measures of the issuing firm’s quality, such as size and participation in
American Depository Receipts (ADR) programs.
180 Rev. Bras. Financ¸ as, Rio de Janeiro,Vol. 10, No. 2, June 2012
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