The Impact of Soft Dollars on Market Equilibrium and Investors' Profits

45 Pages Posted: 28 Jun 2000

See all articles by Gilad Livne

Gilad Livne

University of Exeter Business School

Brett Trueman

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: February 2002

Abstract

This paper examines the impact of soft dollar practices on market equilibrium and trading profits. The setting is one in which there exist both money managers and individual (nonclient) investors and in which soft dollar payments from brokers to money managers cannot be publicly observed. In this context it is shown that soft dollars increase the trading aggressiveness of money managers and decrease the aggressiveness of nonclient investors. Under certain conditions, the increased trading aggressiveness of the managers leads to an increase in their clients' expected profits, but to a decline in market liquidity and total trading volume. These results hold whether or not the clients adjust the money managers' fee for the expected soft dollar payments. However, if the actual amount of soft dollars paid were observable, their value to the client may disappear. The results of this paper should be of interest to the Securities and Exchange Commission, which is currently considering expanding the reporting requirements for soft dollars.

JEL Classification: G12

Suggested Citation

Livne, Gilad and Trueman, Brett, The Impact of Soft Dollars on Market Equilibrium and Investors' Profits (February 2002). London Business School Accounting Subject Area No. 005; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=229468 or http://dx.doi.org/10.2139/ssrn.229468

Gilad Livne (Contact Author)

University of Exeter Business School ( email )

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Rennes Drive
Exeter, EX4 4JH
United Kingdom
+44(0)1392 724436 (Phone)

Brett Trueman

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-4720 (Phone)
310-267-2193 (Fax)

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