The impact of democracy on liquidity and information asymmetry for NYSE cross-listed stocks

Abstract

We investigate the empirical relationship between a country's democracy level, measured using the Democracy Index's five categories (electoral process and pluralism, the functioning of government, political participation, political culture, and civil liberties), and market liquidity for non-US stocks listed on the New York Stock Exchange (NYSE) from 2014 to 2019. Our analysis shows that non-US stocks from countries with stronger democratic institutions have narrower spreads, a higher market quality index, smaller price impacts of trades, and lower probabilities of information-based trading. We also find a significant correlation between changes in our liquidity measures and variations in a country's overall democracy level over time. Our results suggest that improving a country's level of democracy can enhance the market liquidity and quality of non-US stocks, thus benefiting investors and promoting the overall stability and efficiency of financial markets.