Download this Paper Open PDF in Browser

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

37 Pages Posted: 15 Nov 2004  

Stephen M. Horan

CFA Institute

D. Bruce Johnsen

George Mason University - School of Law; PERC - Property and Environment Research Center

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 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

Stephen Horan

CFA Institute ( email )

915 East High Street
Charlottesville, VA 22902
United States

D. Bruce Johnsen (Contact Author)

George Mason University - School of Law ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8066 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

Paper statistics

Downloads
232
Rank
110,283
Abstract Views
3,618