Abstract
We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on the impact of FTTs. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the idea that a lower trading volume reduces liquidity, and thereby market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short-term to long-term institutional investors. More generally, our findings confirm that moderate aggregate effects on market quality can mask large adjustments made by individual market participants.
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