Advanced Search
MyIDEAS: Login to save this article or follow this journal

Can third-party payments benefit the principal?: The case of soft dollar brokerage

Contents:

Author Info

  • Horan, Stephen M.
  • Johnsen, D. Bruce
Registered author(s):

    Abstract

    In a typical soft dollar arrangement, a security broker provides an institutional portfolio manager with credits to buy research from independent vendors in consideration for the manager's promise to send the broker premium commission business when trading his portfolio securities. Because portfolio investors implicitly pay for brokerage, critics argue soft dollars reflect a breach of loyalty in which the manager unjustly enriches himself by shifting to investors the research bill he should pay out of his own pocket. We hypothesize, to the contrary, that by paying the manager's research bill up-front the broker posts a quality-assuring performance bond that efficiently subsidizes the manager's investment research. Our database of private money managers shows premium commissions are positively related to risk-adjusted performance, suggesting soft dollars benefit investors. Premium commissions are also positively related to management fees, suggesting soft dollars are not a pure wealth transfer from investors that is competed away in the managerial labor market.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/B6V7M-4RFSCWV-1/1/fe91ad1dd637e94473937b9ee4056c92
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Law and Economics.

    Volume (Year): 28 (2008)
    Issue (Month): 1 (March)
    Pages: 56-77

    as in new window
    Handle: RePEc:eee:irlaec:v:28:y:2008:i:1:p:56-77

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/irle

    Related research

    Keywords:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
    2. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
    3. Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Jennifer S. Conrad, 2001. "Institutional Trading and Soft Dollars," Journal of Finance, American Finance Association, vol. 56(1), pages 397-416, 02.
    5. Tae-Young Paik & Pradyot K. Sen, 1995. "Project Evaluation and Control in Decentralized Firms: Is Capital Rationing Always Optimal?," Management Science, INFORMS, vol. 41(8), pages 1404-1414, August.
    6. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    7. Horan, Stephen M, 1998. "A Comparison of Indexing and Beta among Pension and Nonpension Assets," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 21(3), pages 255-75, Fall.
    8. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169.
    9. Paul G. Mahoney, 2004. "Manager-Investor Conflicts in Mutual Funds," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 161-182, Spring.
    10. Coase, R H, 1979. "Payola in Radio and Television Broadcasting," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 269-328, October.
    11. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    12. Robert A. Korajczyk & Ronnie Sadka, 2003. "Are Momentum Profits Robust to Trading Costs?," Finance 0308004, EconWPA.
    13. Garbade, Kenneth D & Silber, William L, 1982. " Best Execution in Securities Markets: An Application of Signaling and Agency Theory," Journal of Finance, American Finance Association, vol. 37(2), pages 493-504, May.
    14. Keim, Donald B. & Madhavan, Ananth, 1995. "Anatomy of the trading process Empirical evidence on the behavior of institutional traders," Journal of Financial Economics, Elsevier, vol. 37(3), pages 371-398, March.
    15. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    16. Jarrell, Gregg A, 1984. "Change at the Exchange: The Causes and Effects of Deregulation," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 273-312, October.
    17. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
    18. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    19. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
    20. Macey, Jonathan R. & O'Hara, Maureen, 1997. "The Law and Economics of Best Execution," Journal of Financial Intermediation, Elsevier, vol. 6(3), pages 188-223, July.
    21. Daylian M. Cain & George Loewenstein & Don A. Moore, 2005. "The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 1-25, 01.
    22. Barzel, Yoram, 1987. "The Entrepreneur's Reward for Self-policing," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 103-16, January.
    23. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1703, 08.
    24. Chiraphol N. Chiyachantana & Pankaj K. Jain & Christine Jiang & Robert A. Wood, 2004. "International Evidence on Institutional Trading Behavior and Price Impact," Journal of Finance, American Finance Association, vol. 59(2), pages 869-898, 04.
    25. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:irlaec:v:28:y:2008:i:1:p:56-77. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.