Does Transparency Overcome Conflicts of Interest? Evidence from Investment Managers and Their Brokers

46 Pages Posted: 21 Mar 2009 Last revised: 14 Mar 2012

Mark Abrahamson

University of Oxford - Said Business School

Tim Jenkinson

University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Miguel Sousa

School of Economics and Management, University of Porto

Date Written: March 1, 2012

Abstract

The relationship between investment managers and brokers has been identified by regulators in Europe and the US as a potential source of conflicts of interest, with investment managers buying a bundle of services – including trade execution and sell-side research – from brokers at the expense of the investors. Little systematic evidence is available, however, on this complex relationship. This paper reports the outcome of a landmark ruling under the UK Freedom of Information Act, whichallowed us to obtain, from UK public pension funds, information on commissions, trading activity, payments for research and other variables. Following an important regulatory change in the UK that increased transparency, we find that average commission rates have fallen, and the proportion spent on research – rather than execution – has increased slightly. However, trading has increased significantly: the average churn rate increased from 27% to 73% from 2005-08, resulting in total commission payments to brokers nearly doubling.

Keywords: Brokerage, investment managers, pension funds, commissions

JEL Classification: G23, G24, G28

Suggested Citation

Abrahamson, Mark and Jenkinson, Tim and Sousa, Miguel, Does Transparency Overcome Conflicts of Interest? Evidence from Investment Managers and Their Brokers (March 1, 2012). Available at SSRN: https://ssrn.com/abstract=1364391 or http://dx.doi.org/10.2139/ssrn.1364391

Mark Abrahamson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Tim Jenkinson (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288916 (Phone)
+44 1865 288831 (Fax)

HOME PAGE: http://www.sbs.oxford.edu/timjenkinson

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Miguel Sousa

School of Economics and Management, University of Porto ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

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