Abstract
We offer new hypotheses to explain the level of implicit trading costs experienced by investors in limit order book market. Essentially, divergence of opinion gives raise to implicit trading costs. The intensity of this relationship depends on short-selling constraints in each stock. We find that divergence of opinion has larger impacts on implicit costs when short-selling constraints are minimized. Furthermore, the evidence that divergence of opinion affects implicit costs associated with buy orders than those associated with sell orders is only pronounced in stocks with the least short-selling constraints.
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