Working Paper No. 04-50:
Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution?


Stephen Horan, D. Bruce Johnsen

Date Posted: 2004

Abstract (below)
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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.