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.
Disciplines
Banking and Finance Law | Economics | Law and Economics
Date of this Version
November 2004
Recommended Citation
Stephen M. Horan and D. Bruce Johnsen, "Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution?" (November 2004). George Mason University School of Law Working Papers Series. Working Paper 7.
https://law.bepress.com/gmulwps/art7