Transactions Costs and Holding Periods for Common Stocks




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    • The University of Arizona. We thank Hans Stoll, Robert Whaley, Venkat Eleswarapu, and Marc Reinganum for providing us with their bid-ask spread data, Kevin Kneafsey and Bill Elliott for computer assistance, and Yakov Amihud, Hank Bessembinder, Doc Ghose, Larry Harris, Ed Kane, Ken Kroner, Simon Kwan, Rob Weigand, and especially René Stulz (the editor) and the anonymous referees for their comments and suggestions.


Amihud and Mendelson (1986) and Constantinides (1986) provide a theoretical basis for the proposition that assets with higher transactions costs are held by investors for longer holding periods, and vice versa. We examine average holding periods and bid-ask spreads for Nasdaq stocks from 1983 through 1991 and for New York Stock Exchange (NYSE) stocks from 1975 through 1989 and find strong evidence that, as predicted, the length of investors' holding periods is related to bid-ask spreads. We also find that the relation between holding periods and bid-ask spreads is much stronger on Nasdaq, where spreads are larger, than on the NYSE, where spreads are smaller.