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Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution?


Stephen M. Horan


CFA Institute

D. Bruce Johnsen


George Mason University - School of Law; PERC - Property and Environment Research Center

March 2004

George Mason Law & Economics Research Paper No. 04-50

Abstract:     
With soft dollar brokerage, institutional portfolio managers pay brokers "premium" commission rates in exchange for rebates they use to buy third-party research. One hypothesis views this practice as a reflection of the agency problem in delegated portfolio management; another views it as a contractual solution to the agency problem that aligns the incentives of investors, managers, and brokers where direct monitoring mechanisms are inadequate. Using a database of institutional money managers, we find that premium commission payments are positively related to risk-adjusted performance, suggesting that soft dollar brokerage is a solution to agency problems. Moreover, premium commissions are positively related to management fees, suggesting that labor market competition does not punish managers for using soft dollars.

Number of Pages in PDF File: 37

Keywords: Portfolio choice, Investment Decisions

JEL Classification: G11

working papers series


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Date posted: November 15, 2004  

Suggested Citation

Horan, Stephen M. and Johnsen, D. Bruce, Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution? (March 2004). George Mason Law & Economics Research Paper No. 04-50. Available at SSRN: http://ssrn.com/abstract=615281 or http://dx.doi.org/10.2139/ssrn.615281

Contact Information

Stephen Horan
CFA Institute ( email )
560 Ray C. Hunt Drive
Charlottesville, VA 22903
United States
D. Bruce Johnsen (Contact Author)
George Mason University - School of Law ( email )
3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8066 (Phone)
703-993-8088 (Fax)
PERC - Property and Environment Research Center
2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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