Is There Investment Value in Soft Dollar Arrangements? Evidence from Mutual Funds

Abstract

Combining novel data on analyst employment history and mutual fund commission payments, we show that client funds generate higher returns on stocks for which they have access to research by industry expert analysts. The outperformance is greater when funds are more important clients, and it cannot be attributed to tipping. Client funds place modestly higher weights on stocks covered by industry expert analysts and allocate more commissions to brokers providing such coverage. For identification, we exploit exogenous analyst coverage disruptions. Our findings contribute to the debate on whether mutual funds obtain investment value from access to analysts through soft-dollar arrangements.

Keywords: Soft-dollar arrangements, broker commissions, mutual funds, sell-side research, industry knowledge, analyst coverage terminations

JEL Classification: G11, G14, G17, G20