37 Pages Posted: 15 Nov 2004
Date Written: March 2004
With soft dollar brokerage, institutional portfolio managers pay brokers "premium" commission rates in exchange for rebates they use to buy third-party research. One hypothesis views this practice as a reflection of the agency problem in delegated portfolio management; another views it as a contractual solution to the agency problem that aligns the incentives of investors, managers, and brokers where direct monitoring mechanisms are inadequate. Using a database of institutional money managers, we find that premium commission payments are positively related to risk-adjusted performance, suggesting that soft dollar brokerage is a solution to agency problems. Moreover, premium commissions are positively related to management fees, suggesting that labor market competition does not punish managers for using soft dollars.
Keywords: Portfolio choice, Investment Decisions
JEL Classification: G11
Suggested Citation: Suggested Citation
Horan, Stephen M. and Johnsen, D. Bruce, Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution? (March 2004). George Mason Law & Economics Research Paper No. 04-50. Available at SSRN: https://ssrn.com/abstract=615281 or http://dx.doi.org/10.2139/ssrn.615281