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FIIE-13: Incentives and Agency Conflicts
Deleting Misconduct: The Expungement of BrokerCheck Records
1Stanford Law School, United States of America; 2Harvard University
We examine a controversial process, known as expungement, that allows brokers to remove evidence of financial misconduct from public records. From 2007-2016, we identify 6,660 expungement attempts, suggesting that brokers attempt to expunge 12% of the allegations of misconduct reported by customers and firms. Of these attempts, 70% were successful. We show that expungement attempts significantly predict future misconduct. Further, using an instrumental variable based on the random assignment of arbitrators, we show that brokers who receive expungement are more likely to reoffend than brokers denied expungement. By contrast, there is only limited evidence that successful expungements improve career prospects.
Incentives of Financial Analysts: Trading Turnover and Compensation
University of Groningen, Netherlands, The
Are sell-side security analysts paid for turnover-generating research? Using hand-collected annual income data from tax records in Sweden, I show that analysts' compensations increase in the trading turnover that their recommendations generate. Analysts are paid 0.002 percent of broker-trading volume or approximately 1 percent of broker's commission revenues. I find a significant broker-turnover analyst-pay relationship only in the post-global-settlement period, and the relation is strongest for investment banking clients' stocks. Additional analyses indicate that the relationship is significant only for the more experienced analysts and for positive recommendations. These findings empirically validate the previously assumed turnover-compensation link and may have policy implications related to the Markets in Financial Instruments Directive.
Institutional Order Handling and Broker-Affiliated Trading Venues
1Whitman School of Management, United States of America; 2SMU Cox School of Business, United States of America; 3FINRA, United States of America
Using detailed order handling data over the life of 350 million institutional orders, we study whether order routing by brokers to Alternative Trading Systems (ATSs) that they own affects execution quality. In regressions that account for stock characteristics, order attributes and market conditions, orders handled by brokers with high affiliated ATS routing are associated with lower fill rates and higher implementation shortfall (trading) costs. Similar results are obtained for “not-held” orders, large institutional orders and matched samples that account for client intentions. Our results suggest that improved disclosures on order handling could help institutions with broker selection.
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