The Role of Education in Capital Markets’ Liquidity

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This paper examines the extent to which education may explain liquidity in the capital markets. Using a database containing information about primary and secondary education, as estimated by the World Bank, and a dataset of American Depository Receipts (ADRs) we demonstrate that education plays an important role in supporting liquidity, one of the most important variables in the quality of capital markets. Our results consistently show that education improves ADR spreads and price impact measures. We conclude that given that liquidity itself has benefits, such as boosting economic growth, investment, and savings, any reforms or policies that increase the level of education will benefit individuals, firms, and other financial agents, eventually benefitting the country as a whole.