Broker Rebates and Investor Sophistication

41 Pages Posted: 10 Sep 2014

See all articles by Mor Haziza

Mor Haziza

Tel Aviv University - The Leon Recanati Graduate School of Business Administration

Avner Kalay

Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business

Date Written: September 9, 2014

Abstract

Following a ruling of the Israeli Securities Authority, portfolio managers had to obtain their clients’ consent, in writing; so that they can continue to receive a fraction of the transaction costs their clients pay the broker executing the trades. One would expect an overwhelming opposition to the kickback as consenting investors are exposed to avoidable losses due to (moral hazard) access trading. Yet the opposite is found – about 89% of the investors in our sample allowed their manager to receive a kickback. This is quite remarkable considering that not responding is taken as a prohibition. Indeed, the more sophisticated investors tend to disagree. We find that portfolios of consenting investors underperform in the year following their decision. Also, the empirical evidence indicates that consenting is not a reward on past success.

Keywords: Investor Sophistication, Financial Intermediaries, Soft dollars, Kickbacks

Suggested Citation

Haziza, Mor and Kalay, Avner, Broker Rebates and Investor Sophistication (September 9, 2014). Available at SSRN: https://ssrn.com/abstract=2493693 or http://dx.doi.org/10.2139/ssrn.2493693

Mor Haziza

Tel Aviv University - The Leon Recanati Graduate School of Business Administration ( email )

P.O. Box 39010
Ramat Aviv Tel Aviv 69972, 69978
Israel

Avner Kalay (Contact Author)

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
972 3 6406298 (Phone)
972 3 6406330 (Fax)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801-581-5457 (Phone)

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