Trust and delegation: A case to consider on broker rebates and investor sophistication

Mor M. Haziza and Avner Kalay

Journal of Financial Markets, 2020, vol. 49, issue C

Abstract: Following a notice of the Israeli Securities Authority, portfolio managers had to obtain their clients’ proper and legal approval, in writing, so that they can receive a fraction of the transaction costs, their clients pay the broker executing the trades. One would expect an overwhelming opposition to the kickback as consenting investors are exposed to avoidable losses due to (moral hazard) excessive trading. Yet about 89% of the investors in our sample allowed their manager to receive a kickback. This is quite remarkable considering that not responding implies a prohibition. Indeed, the more sophisticated investors tend to disagree. We find that portfolios of consenting investors underperform in the year following their decision. In addition, the empirical evidence indicates that consenting is not a reward on past success.

Keywords: Financial intermediation; Investor sophistication; Rebates; Soft-dollars (search for similar items in EconPapers)
JEL-codes: G20 G23 G28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1386418119303568
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:49:y:2020:i:c:s1386418119303568

DOI: 10.1016/j.finmar.2019.100526

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Catherine Liu ().