TRADING COSTS OF NON-U.S. STOCKS ON THE NEW YORK STOCK EXCHANGE: THE EFFECT OF INSTITUTIONAL OWNERSHIP, ANALYST FOLLOWING, AND MARKET REGULATION

We investigate the differences in market microstructure between U.S. and non-U.S. stocks cross-listed on the New York Stock Exchange using a sample of 316 pairs of matched stocks. We find that non-U.S. stocks have wider spreads and larger adverse-selection costs than U.S. stocks even after controlling for macro-level institutional differences. Regression analysis shows that spreads and adverse-selection costs are negatively correlated with institutional ownership and analyst followings. Thus, the higher spreads and adverse-selection costs for non-U.S. stocks can be partly explained by the lower institutional ownership and analyst following of non-U.S. stocks. In addition, we find that although the spreads and adverse-selection costs for non-U.S. stocks are significantly higher before the implementation of Regulation Fair Disclosure (FD), the differences become even greater after Regulation FD, suggesting that Regulation FD has improved the information environment for U.S. stocks. 2005 The Southern Finance Association and the Southwestern Finance Association.