Working Paper: NBER ID: w26147
Authors: Marco Di Maggio; Mark L. Egan; Francesco Franzoni
Abstract: We estimate a structural model of broker choice to quantitatively decompose the value that institutional investors attach to broker services. Studying over 300 million institutional equity trades, we find that investors are sensitive to both explicit and implicit trading costs and are willing to pay a premium for access to formal and informal research. Formal and informal research account for roughly half of the value generated by brokers. Lastly, we use our model to investigate soft-dollar arrangements, where research and execution services are bundled, and find that such arrangements allow hedge funds and mutual funds to underreport management fees by 10%.
Keywords: Broker Choice; Institutional Investors; Soft Dollars; Research Value; Trading Costs
JEL Codes: G12; G23; G24; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| broker services (L85) | willingness to pay a premium (D11) |
| formal research (C90) | overall value (D46) |
| informal research (J46) | overall value (D46) |
| hard dollars (E39) | management fees (G19) |
| soft dollars (G19) | underreporting of management fees (G24) |
| explicit and implicit trading costs (F12) | demand elasticity (D12) |
| broker fees (L85) | trading volume (G15) |
| price impact (G14) | implicit costs (D61) |
| investor preferences (G11) | brokerage service valuation (G24) |