Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution?
Stephen M. Horan
D. Bruce Johnsen
George Mason University - School of Law; PERC - Property and Environment Research Center
George Mason Law & Economics Research Paper No. 04-50
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.
Number of Pages in PDF File: 37
Keywords: Portfolio choice, Investment Decisions
JEL Classification: G11
Date posted: November 15, 2004