Essays in Financial Economics Public

Abstract

This dissertation focuses on conflicts of interest in investment management, disclosures and role of ties. The first essay (titled: Connections and Conflicts of Interest: Investment Consultants' Recommendations) studies the effect of connections between investment consultants and managers on manager hiring decisions. Plan sponsors rely on investment consultants' recommendations for hiring money managers to manage their plan funds. Often these investment consultants have their own investment management firms, or have business connections with investment managers, creating a conflict of interest. I find strong evidence that consultants bias hiring decisions towards their connected managers: a direct connection to a consultant increases a manager's odds of being hired by 637%, while an indirect connection increases the odds by 301%. The hiring decisions are less sensitive to past performance and management fee when connected managers are hired. I further find that, post hiring, the funds managed by the connected managers underperform significantly relative to the funds managed by the unconnected managers. The second essay (Titled: Do Funds Mask Distribution Fees as Brokerage Commissions?) studies conflicts of interest faced by investment advisers. Investment advisers may have an informal agreement with their selling brokers under which selling brokers put more effort to sell the fund and in return the advisor rewards the selling broker by directing its portfolio transactions to them and allows the broker to charge higher commissions. In 2004, although SEC prohibited the use of brokerage commissions to finance fund distribution, the regulation does not seem to be effective in resolving the agency conflict here. Focusing on the period from 2005 to 2014, I find strong evidence of investment advisers allying with their selling brokers. Funds pay 25bp higher brokerage commissions to their trading brokers who are also fund distributors, thus paying them more than double the commissions paid on average to non-selling brokers. Most investment advisors also have their own brokerage business. I find that funds pay 15bp higher brokerage commissions to their affiliated brokers when they use them for portfolio transactions. Hence on average, the affiliated brokers are paid 1.5 times the brokerage commission paid to non-affiliated brokers.

Table of Contents

Contents

Connections and Conflicts of Interest: Investment Consultants' Recommendations 1 1 Introduction 2 2 Connection Measures and Methodology 7 2.1 Business Connection Measures . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 Manager Hiring Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3 Data 10 3.1 Manager Hiring and Consultant data . . . . . . . . . . . . . . . . . . . . . . 10 3.2 Connections data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.3 Manager data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.4 Sample Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.5 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4 Results 15 4.1 Manager Hiring Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.2 Post Hiring Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.3 The Eect of Chief Compliance Rule . . . . . . . . . . . . . . . . . . . . . . 20 4.4 Hiring Decision and Post Hiring Performance: By Indirect Connection Types 20 5 Robustness Test 21 5.1 Hiring Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.2 Post Hiring Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6 Conclusion 22
Do Funds Mask Distribution Fees as Brokerage Commissions? 24 7 Introduction 25 8 The SEC Regulations 30 8.1 The Use of Aliated Broker for Portfolio Transactions . . . . . . . . . . . . 30 8.2 The Use of Selling Broker for Portfolio Transactions . . . . . . . . . . . . . . 30 9 Data 32 9.1 NSAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.2 FINRA Broker Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.3 Morningstar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.4 Sample Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.5 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 10 Results 37 10.1 Brokerage Commission - Aliated Broker Use . . . . . . . . . . . . . . . . . 38 10.2 Brokerage Commission -Selling Broker Use . . . . . . . . . . . . . . . . . . . 39 10.3 Fund Returns - Selling/Aliated Broker Use . . . . . . . . . . . . . . . . . . 40 10.4 Fund Distribution Fee - Selling Broker Use . . . . . . . . . . . . . . . . . . . 41 10.5 Fund Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 10.6 Economic impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 11 Robustness 43 11.1 Selling Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 11.2 Fund Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 12 Conclusion 44 List of Figures 46 List of Tables 46 List of Figures 1 Connection Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 List of Tables 1 Variable Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 2 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3 Manager Hiring Decision . . . . . . . . . . . . . . . . . . . . . . . . . . 50 4 Drivers of Hiring Decision when Connected Managers are Hired . 51 5 Post Hiring Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 52 6 Post Hiring Performance (Other measures of Performance) . . . . . 53 7 Manager Hiring Decision - After Chief Compliance Ocer rule . . 54 8 Drivers of Hiring Decision when Connected Managers are Hired - After Chief Compliance Ocer rule . . . . . . . . . . . . . . . . . . . 55 9 Post Hiring Performance - After Chief Compliance Ocer rule . . 56 10 Post Hiring Performance (Other measures of Performance) - After Chief Compliance Ocer rule . . . . . . . . . . . . . . . . . . . . . . . 57 11 Manager Hiring Decision - By Indirect Connection types . . . . . . 58 12 Post Hiring Performance - By Indirect Connection types . . . . . . 59 13 Manager Hiring Decision - Restricting the number of Candidates . 60 14 Drivers of Hiring Decision when Connected Managers are Hired - Restricting the number of Candidates . . . . . . . . . . . . . . . . . . 61 15 Consultants Hiring Both Connected and Unconnected Managers within 30 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 16 Brokerage Commissions Paid Each Year . . . . . . . . . . . . . . . . . 63 17 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 18 Impact of Using Aliated Brokers on Brokerage Commissions (1996 to 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 19 Impact of Using Aliated Brokers on Brokerage Commissions (1996 to 2014) - Single Broker Funds . . . . . . . . . . . . . . . . . . . . . . . 67 20 Impact of Using Selling Brokers on Brokerage Commissions . . . . 68 21 Impact of Using Selling Brokers on Brokerage Commissions - Single Broker Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 22 Impact of Using Aliated and Selling Brokers on Brokerage Com- missions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 23 Impact of Using Aliated and Selling Brokers on Brokerage Com- missions - Single Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 24 Impact of Using Aliated and Selling Brokers on Fund Returns . 72 25 Distribution Fee (2005 to 2014) . . . . . . . . . . . . . . . . . . . . . . 73 26 Flow Performance Sensitivity . . . . . . . . . . . . . . . . . . . . . . . 74 27 Economic impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 28 Impact of Using Selling Brokers on Brokerage Commissions - Selling Brokers from Morningstar . . . . . . . . . . . . . . . . . . . . . . . . . 76 29 Brokerage Commissions for Single Broker Funds - By Fund Size . 77

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School	Laney Graduate School
Department	Business
Degree	PhD
Submission	Dissertation
Language	English
Research Field	Economics, Finance
Mot-clé	Investments Mutual Funds Conflicts of Interest and Disclosures
Committee Chair / Thesis Advisor	Chordia, Tarun, Emory University Jegadeesh, Narasimhan, Emory University
Committee Members	Pownall, Grace, Emory University Busse, Jeffrey, Emory University

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