The Use of Broker Votes to Reward Brokerage Firms' and Their Analysts' Research Activities
David A. Maber
University of Michigan, Stephen M. Ross School of Business
Harvard Business School
Paul M. Healy
Harvard Business School; National Bureau of Economic Research (NBER)
July 14, 2014
In traditional markets, the price mechanism directs the flow of resources and governs the process through which supply and demand are brought into equilibrium. In the investment-research industry, broker votes perform these functions. We contribute to the literature by investigating the responsiveness of broker votes to changes in three categories of sell-side analyst service: published research, high-touch meetings and phone calls, and concierge services that connect client investors with corporate managers. We find that broker votes are most responsive to services suited to the revelation of fundamental, but not necessarily timely investment information, consistent with broker votes being used to compensate analysts’ information-intermediation role. Supplemental tests are consistent with institutional investors using broker votes to budget future aggregate commission payments across brokerage firms and brokerage firms using their clients’ votes as a quasi allocation base to indirectly reward individual analysts for contributions to brokerage-wide commission payments. Overall, our results suggest that broker votes function as the nexus for a set of implicit contractual relationships between sell-side brokers, their affiliated analysts, and their buy-side clients.
Keywords: Markets for information, Sell-side analysts, Commissions, Broker votes, Compensation, Public and private communications, Management access, Relational contracts
JEL Classification: G240, M52, M55, D82
Date posted: August 17, 2013 ; Last revised: September 24, 2015
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