Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution?

37 Pages Posted: 15 Nov 2004

See all articles by Stephen Horan

Stephen Horan

CFP Board of Standards; University of North Carolina Wilmington

D. Bruce Johnsen

Independent

Date Written: March 2004

Abstract

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

Horan, Stephen and Johnsen, D. Bruce, Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution? (March 2004). Available at SSRN: https://ssrn.com/abstract=615281 or http://dx.doi.org/10.2139/ssrn.615281

Stephen Horan

CFP Board of Standards ( email )

1425 K Street NW #800
Washington, DC 20005
United States

University of North Carolina Wilmington ( email )

601 South College Road
Wilmington, NC 28403
United States
4342272281 (Phone)
28405 (Fax)

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