Financial Transaction Tax in Tehran Stock Exchange (Composition versus Liquidity Effect)

Policymakers attempt to improve the market quality of stock exchanges by implementing various regulations. Even though the transaction tax has always affected exchanges, the consequences of such policy on various aspects of market quality have often been understudied in Iran. Thus this paper, using high-frequency data of 422 companies in the period from June to November 2018, investigates the effect of reducing transaction tax in different quality measures of Tehran Stock Exchange. Considering the fact that reduction of transaction tax in September 2018 has not been applied to investment funds, the DID approach has been implemented. According to the results, the reduction of transaction tax in September 2018 has increased the volume of transactions and market efficiency, while market volatility has decreased in effect. This result, therefore, confirms the liquidity versus composition effect through which the reduction of transaction tax increases the market efficiency by an increment of liquidity.