Transaction cost unbundling and investors’ reliance on investment research: Evidence from experimental asset markets

Sebastian Stirnkorb

Accounting, Organizations and Society, 2024, vol. 112, issue C

Abstract: Broker-dealers traditionally charge their clients for the provision of investment research with a composite fee that bundles payments for research with other variable fees, such as those for trade executions. Due to regulatory changes in Europe, US broker-dealers temporarily allowed some of their clients to pay an explicit fee for the provision of investment research. Drawing on the sunk cost literature, I examine how transaction cost unbundling influences investors’ reliance on investment research. Results from 16 experimental markets indicate that investors place greater weight on costly forecasts under a system of unbundled payments compared to bundled payments, but only if transaction costs are sufficiently high, which is consistent with the dynamics of a sunk cost fallacy. I find marginal evidence that the enhanced focus on the forecast further inhibits investors' learning, as reflected in a slower reduction of price errors over time. These results are important since investors worldwide are increasingly paying explicit charges for investment research, a trend reinforced by a recent SEC policy change.

Keywords: Transaction costs; Unbundling; Sunk cost fallacy; Investor judgment and decision making; Experimental markets; MiFID II (search for similar items in EconPapers)
JEL-codes: C91 C92 G1 G4 M41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:aosoci:v:112:y:2024:i:c:s0361368224000023

DOI: 10.1016/j.aos.2024.101542

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