Execution Costs and Investment Performance: An Empirical Analysis of Institutional Equity Trades (Revised: 9-95)

Donald Keim () and Ananth Madhavan

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: We examine the magnitude and determinants of execution costs are associated with institutional equity trades and their effect on investment performance. Using detailed information on over $83 billion of recent equity transactions by 21 institutions, we analyze the major components of execution costs, including explicit and implicit costs. We find that execution costs are significantly related to trade size, exchange listing, and the traded stock’s market capitalization. We also find that buyer-initiated trades are more costly than equivalent seller-initiated trades. Our results indicate that execution costs have a significant effect on performance over short horizons, and there is significant variation in trading costs and performance across institutions, reflecting differences in trading ability and style. The results provide a way to assess various trading strategies and to form benchmarks to evaluate portfolio managers.

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