Transaction Costs

In investing, transaction costs include brokerage commissions, the spread between buying and selling prices, the market impact of large trades, and taxes such as stamp duty. They reduce returns, which is why frequent trading can significantly erode performance.

In mergers and acquisitions, transaction costs can be substantial. They include fees for investment banks, lawyers, accountants and other advisers, due diligence costs, financing fees for arranging new debt, regulatory filing fees and taxes.

For example, in a 500,000,000 acquisition, the buyer might incur 15,000,000 to 20,000,000 in advisory, legal and financing fees.

The accounting treatment varies. Under both IFRS and US GAAP, acquisition-related costs are generally expensed as incurred rather than added to the cost of the acquisition, while costs of issuing debt or shares are deducted from the amounts raised. In economics, transaction costs more broadly include the time and effort of searching, negotiating and enforcing agreements, which affect how markets and firms are organised.