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.
Banking and Finance Law | Economics | Law and Economics
Date of this Version
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.