Does Local Competition and Firm Market Power Affect Investment Adviser Misconduct?

33 Pages Posted: 20 Aug 2020 Last revised: 11 Jan 2021

See all articles by Michael Gelman

Michael Gelman

Alfred Lerner College of Business and Economics, The University of Delaware; Wharton School, University of Pennsylvania (visiting)

Amir Shoham

Temple University - Department of Finance

Shlomo Tarba

University of Birmingham

Zaheer Khan

University of Aberdeen

Date Written: August 4, 2020

Abstract

This paper examines the impact of local competition and local firm market power on misconduct by analyzing the investment adviser market. The study is based on an extensive sample of more than 3.8 million employee-year observations of investment advisers resulting in 709,416 firm-county-year observations over 12 years. The findings show that a firm’s market power at the county level and county market competition have a negative influence on investment adviser misconduct. The result is robust to a battery of empirical tests. We show that in counties where the same firm has greater local market power, it exhibits less misconduct. We also identify the effect of local competition and market power on misconduct using two exogenous shocks, M&A and ending a local monopoly. We establish the adviser’s employment stability as a novel channel for explaining the impact of local competition and firm market power on misconduct.

Keywords: Misconduct, Investment Adviser, Local Competition, Local Market Power, HHI

JEL Classification: G2, G20, K42

Suggested Citation

Gelman, Michael and Shoham, Amir and Tarba, Shlomo and Khan, Zaheer, Does Local Competition and Firm Market Power Affect Investment Adviser Misconduct? (August 4, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3666596 or http://dx.doi.org/10.2139/ssrn.3666596

Michael Gelman (Contact Author)

Alfred Lerner College of Business and Economics, The University of Delaware; Wharton School, University of Pennsylvania (visiting) ( email )

20 Orchard Rd
United States

Amir Shoham

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

Shlomo Tarba

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

Zaheer Khan

University of Aberdeen ( email )

Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

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