The Value of Intermediation in the Stock Market

63 Pages Posted: 2 Aug 2019 Last revised: 15 Jul 2021

See all articles by Marco Di Maggio

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Mark Egan

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: June 1, 2021

Abstract

We estimate a structural model of broker choice to quantitatively decompose the value that institutional investors attach to broker services. Studying over 300 million institutional equity trades, we find that investors are sensitive to both explicit and implicit trading costs and are willing to pay a premium for access to formal and informal research. Formal and informal research account for roughly half of the value generated by brokers. Lastly, we use our model to investigate soft-dollar arrangements, where research and execution services are bundled, and find that such arrangements allow hedge funds and mutual funds to underreport management fees by 10%.

Keywords: Financial Intermediation, Institutional Investors, Research Analysts, Broker Networks, Equity Trading

JEL Classification: L11, G14, G23, G24

Suggested Citation

Di Maggio, Marco and Egan, Mark and Franzoni, Francesco A., The Value of Intermediation in the Stock Market (June 1, 2021). Swiss Finance Institute Research Paper No. 21-01, Harvard Business School Finance Working Paper No. 20-016, Available at SSRN: https://ssrn.com/abstract=3430405 or http://dx.doi.org/10.2139/ssrn.3430405

Marco Di Maggio

Harvard Business School ( email )

Soldiers Field
Baker Library 265
Boston, MA 02163
United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark Egan (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Baker Library 365
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francesco A. Franzoni

USI Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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