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Financial Market Design and the Equity Premium: Electronic versus Floor Trading



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    • Jain is from Fogelman College of Business and Economics, the University of Memphis. The paper is abstracted from my doctoral dissertation at Indiana University. I would like to thank Utpal Bhattacharya, Ian Domowitz, Craig Holden, Richard Green (the former editor), Robert Jennings, an anonymous referee, and seminar participants at Indiana University, the University of South Carolina, the University of Texas at Dallas, the Midwest Financial Association Meeting 2002, the Financial Management Association Meeting 2002, the Eastern Finance Association Meeting 2003, and the American Finance Association Meeting 2004 for their comments and suggestions. Financial support from the Center of International Business Education and Research is gratefully acknowledged. All errors are my responsibility.


We assemble the announcement and actual introduction dates of electronic trading by the leading exchanges of 120 countries to examine the impact of automation, controlling for risk factors and economic conditions. Dividend growth models and international CAPM suggest a significant decline in the equity premium, especially in emerging markets. Consistent with this reduction in the equity premium in the long run, there is a positive short-term price reaction to the switch. Further analysis of trading turnover supports the notion that electronic trading enhances the liquidity and informativeness of stock markets, leading to a reduction in the cost of capital.

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