IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-19-00441.html
   My bibliography  Save this article

Unbundling financial services: The case of brokerage and investment research

Author

Listed:
  • Sébastien Galanti

    (LEO - University of Orléans)

  • Anne-Gaël Vaubourg

    (CRIEF - University of Poitiers)

Abstract

Brokers were previously allowed to provide brokerage and financial research as a single package, but unbundling rules recently introduced in Europe now oblige them to charge separately for the two services. To analyze the effect of this regulation, we consider a theoretical duopoly model between a broker who offers a brokerage service and an investment research service and an independent analyst who offers a second investment research service. We show that unbundling rules increase the profitability and market share of the independent analyst and improve social welfare. These findings suggest that unbundling rules are relevant to the sustainability of the independent research industry.

Suggested Citation

  • Sébastien Galanti & Anne-Gaël Vaubourg, 2020. "Unbundling financial services: The case of brokerage and investment research," Economics Bulletin, AccessEcon, vol. 40(1), pages 473-484.
  • Handle: RePEc:ebl:ecbull:eb-19-00441
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2020/Volume40/EB-20-V40-I1-P41.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mehran, Hamid & Stulz, Rene M., 2007. "The economics of conflicts of interest in financial institutions," Journal of Financial Economics, Elsevier, vol. 85(2), pages 267-296, August.
    2. Admati, Anat R. & Pfleiderer, Paul, 1987. "Viable allocations of information in financial markets," Journal of Economic Theory, Elsevier, vol. 43(1), pages 76-115, October.
    3. Galanti, Sébastien & Vaubourg, Anne Gaël, 2017. "Optimism bias in financial analysts' earnings forecasts: Do commissions sharing agreements reduce conflicts of interest?," Economic Modelling, Elsevier, vol. 67(C), pages 325-337.
    4. Vaubourg, Anne-Gael, 2006. "Differentiation and discrimination in a duopoly with two bundles," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 753-762, July.
    5. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-859, September.
    6. Barber, Brad M. & Lehavy, Reuven & Trueman, Brett, 2007. "Comparing the stock recommendation performance of investment banks and independent research firms," Journal of Financial Economics, Elsevier, vol. 85(2), pages 490-517, August.
    7. Martin, Stephen, 1999. "Strategic and welfare implications of bundling," Economics Letters, Elsevier, vol. 62(3), pages 371-376, March.
    8. Anne-Gaël Vaubourg, 2006. "Differentiation and Discrimination in a Duopoly with two Bundles," Post-Print halshs-00290730, HAL.
    9. Cowen, Amanda & Groysberg, Boris & Healy, Paul, 2006. "Which types of analyst firms are more optimistic?," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 119-146, April.
    10. Oz Shy, 1996. "Industrial Organization: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691795, December.
    11. Lundholm, Rj, 1991. "Public Signals And The Equilibrium Allocation Of Private Information," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 322-349.
    12. Gu, Zhaoyang & Xue, Jian, 2008. "The superiority and disciplining role of independent analysts," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 289-316, August.
    13. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    14. Hayes, RM, 1998. "The impact of trading commission incentives on analysts' stock coverage decisions and earnings forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 36(2), pages 299-320.
    15. Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vaubourg, Anne-Gael, 2006. "Differentiation and discrimination in a duopoly with two bundles," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 753-762, July.
    2. Altınkılıç, Oya & Balashov, Vadim S. & Hansen, Robert S., 2019. "Investment bank monitoring and bonding of security analysts’ research," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 98-119.
    3. Anup Agrawal & Mark A. Chen, 2008. "Do Analyst Conflicts Matter? Evidence from Stock Recommendations," Journal of Law and Economics, University of Chicago Press, vol. 51(3), pages 503-537, August.
    4. Andrew C. Call & Nathan Y. Sharp & Paul A. Wong, 2019. "Changes in analysts’ stock recommendations following regulatory action against their brokerage," Review of Accounting Studies, Springer, vol. 24(4), pages 1184-1213, December.
    5. Régis BRETON & Sébastien GALANTI & Christophe HURLIN & Anne-Gaël VAUBOURG, 2011. "Does the firm-analyst relationship matter in explaining analysts' earnings forecast errors?," LEO Working Papers / DR LEO 469, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    6. Mola, Simona & Guidolin, Massimo, 2009. "Affiliated mutual funds and analyst optimism," Journal of Financial Economics, Elsevier, vol. 93(1), pages 108-137, July.
    7. Oliver Budzinski & Katharina Wacker, 2007. "The Prohibition Of The Proposed Springer-Prosiebensat.1 Merger: How Much Economics In German Merger Control?," Journal of Competition Law and Economics, Oxford University Press, vol. 3(2), pages 281-306.
    8. Dambra, Michael & Field, Laura Casares & Gustafson, Matthew T. & Pisciotta, Kevin, 2018. "The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 302-330.
    9. Xu, Nianhang & Jiang, Xuanyu & Chan, Kam C. & Yi, Zhihong, 2013. "Analyst coverage, optimism, and stock price crash risk: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 217-239.
    10. Thabang Mokoaleli-Mokoteli & Richard J. Taffler & Vineet Agarwal, 2009. "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 384-418.
    11. Akifumi Ishihara & Noriyuki Yanagawa, 2013. "Dark Sides of Patent Pools with Compulsory Independent Licensing," CARF F-Series CARF-F-318, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    12. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    13. Song, Kyojik “Roy” & Mantecon, Tomas & Altintig, Z. Ayca, 2012. "Chaebol-affiliated analysts: Conflicts of interest and market responses," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 584-596.
    14. Cheolwoo Lee, 2013. "Analyst firm parent–subsidiary relationship and conflict of interest: evidence from IPO recommendations," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(3), pages 763-789, September.
    15. Harris, Richard D.F. & Wang, Pengguo, 2019. "Model-based earnings forecasts vs. financial analysts' earnings forecasts," The British Accounting Review, Elsevier, vol. 51(4), pages 424-437.
    16. Tiana Lehmer & Ben Lourie & Devin Shanthikumar, 2022. "Brokerage trading volume and analysts’ earnings forecasts: a conflict of interest?," Review of Accounting Studies, Springer, vol. 27(2), pages 441-476, June.
    17. Andrea Mantovani, 2013. "The Strategic Effect of Bundling: A New Perspective," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 42(1), pages 25-43, February.
    18. Thabang Mokoaleli‐Mokoteli & Richard J. Taffler & Vineet Agarwal, 2009. "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3‐4), pages 384-418, April.
    19. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    20. Andrea Mantovani & Jan Vandekerckhove, 2016. "The Strategic Interplay Between Bundling and Merging in Complementary Markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 37(1), pages 19-36, January.

    More about this item

    Keywords

    analysts; brokers; independent financial research; unbundling rules; social welfare;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-19-00441. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.