BROKER CONFLICTS OF INTEREST
AVOIDING CONFLICT: HOW REGULATING BROKER CONFLICTS OF INTEREST AFFECTS MUTUAL FUNDS
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How do regulatory efforts to alleviate broker conflicts of interest affect the mutual fund industry and investor outcomes? I address this question by studying a recent Department of Labor (DOL) intervention limiting the types of compensation brokers could receive from individual retirement plans (IRAs). I find that this regulation had immediate effects on investment flows and fund offerings. Monthly flows to mutual funds with conflicted broker compensation arrangements decreased relative to those without such arrangements, and the flow-performance sensitivity of these funds became less convex. Moreover, investment companies transitioned away from offering investments with conflicted broker compensation and became less active. At the same time, I find no changes in funds’ risk-adjusted performance, and on a value-weighted basis, funds managed under broker compensation arrangements perform similarly to those managed without these arrangements. Thus, while my results suggest that conflicts of interest drive fund flows and that mitigation efforts may alter capital allocation, improvements to overall investor welfare are limited.
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ZERO COMMISSIONS
HOW FREE IS FREE? RETAIL TRADING COSTS WITH ZERO COMMISSIONS
with Eric Kelley and Samuel Adams
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We examine the economics that underlie retail trading costs around discount brokers’ widespread adoption of zero commission trading in October 2019. Our analysis of participating brokers’ Rule 606 filings and financial statements reveals little change in payment for order flow, which suggests brokers absorbed the cost of eliminating commissions in a competitive environment. We then perform a difference-in-differences analysis of effective spreads and report economically trivial changes in retail execution costs around the commission change. Finally, we assess the total trading costs of an aggregate retail portfolio compared to a host of counterfactuals. We find that following the zero-commission change, total retail transaction costs dropped substantially even under the extreme counterfactual that these traders pay exchange quoted spreads and receive zero price improvement. Our findings support the brokerage industry’s claim that dropping commissions helped retail investors and should ease regulators’ concerns to the contrary.
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RETIREMENT PROVIDERS
THE FRINGE BENEFITS OF FRINGE BENEFITS: WHEN FIRMS BORROW FROM THEIR RETIREMENT PROVIDERS
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I test whether retirement plan providers extend preferential corporate loan terms to firms that have an overlapping retirement plan relationship. I find that loans from affiliated retirement plan providers (i.e., relationship loans) have lower spreads than non-relationship loans. Relationship loans are also larger and exhibit longer maturities. These terms benefit shareholders without sacrificing the quality of retirement plans available to employees. The favorable terms within this banking relationship are most likely explained by the ability of retirement plan relationships to alleviate information asymmetries in the corporate loan market rather than a quid pro quo arrangement.
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