From Implicit to Explicit: The Consequences of Fee Disclosure

41 Pages Posted: 30 Jun 2019

See all articles by Christine Cuny

Christine Cuny

New York University (NYU) - Leonard N. Stern School of Business

Omri Even-Tov

Haas School of Business - UC Berkeley

Edward M. Watts

Stanford University, Graduate School of Business, Students

Date Written: May 24, 2019

Abstract

We investigate whether more salient fee disclosure mitigates bond market professionals' ability to charge retail investors high fees. We explore changes in fees around FINRA's 2018 amendment of the customer confirmation rule, requiring corporate bond market professionals to explicitly disclose the fee (markup) on some retail trades. Investors could have inferred the fee before the rule change using historical transaction prices. Nonetheless, we find that fees associated with trades subject to explicit fee disclosure decline after the rule change, relative to trades that are not subject to explicit fee disclosure. Our findings are pronounced among bonds for which fees were highest before the rule change. In sum, our evidence shows that the nature of fee disclosure (i.e., explicit or implicit) has real effects on corporate bond market professionals' ability to charge high fees for their services.

Keywords: Dealer markets, Disclosure regulation, Processing costs, Investment advisors

JEL Classification: G24, G28, D82, D83

Suggested Citation

Cuny, Christine and Even-Tov, Omri and Watts, Edward, From Implicit to Explicit: The Consequences of Fee Disclosure (May 24, 2019). Available at SSRN: https://ssrn.com/abstract=3393747 or http://dx.doi.org/10.2139/ssrn.3393747

Christine Cuny

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Ste. 10-91
New York, NY NY 10012
United States
212-998-0423 (Phone)

Omri Even-Tov (Contact Author)

Haas School of Business - UC Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
3104302236 (Phone)

Edward Watts

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

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