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

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