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Session Overview
FIIE-13: Incentives and Agency Conflicts
Saturday, 24/Aug/2019:
11:00 - 12:30

Session Chair: Xiaoyun Yu, Indiana University
Location: D -113

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Deleting Misconduct: The Expungement of BrokerCheck Records

Colleen Honigsberg1, Matthew Jacob2

1Stanford Law School, United States of America; 2Harvard University

Discussant: Audra Boone (Texas Christian 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.

efa2019-FIIE-13-292-Deleting Misconduct.pdf

Incentives of Financial Analysts: Trading Turnover and Compensation

Egle Karmaziene

University of Groningen, Netherlands, The

Discussant: Igor Cunha (University of Kentucky)

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.

efa2019-FIIE-13-348-Incentives of Financial Analysts.pdf

Institutional Order Handling and Broker-Affiliated Trading Venues

Amber Anand1, Mehrdad Samadi2, Jonathan Sokobin3, Kumar Venkataraman2

1Whitman School of Management, United States of America; 2SMU Cox School of Business, United States of America; 3FINRA, United States of America

Discussant: Clifton Green (Emory University)

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.

efa2019-FIIE-13-443-Institutional Order Handling and Broker-Affiliated Trading Venues.pdf

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