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  • 2021
  • Working Paper
  • HBS Working Paper Series

The Value of Intermediation in the Stock Market

By: Marco Di Maggio, Mark Egan and Francesco Franzoni
  • Format:Print
  • | Language:English
  • | Pages:63
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Abstract

We estimate a structural model of broker choice to quantitatively decompose the value that institutional investors attach to broker services. Studying over 300 million institutional equity trades, we find that investors are sensitive to both explicit and implicit trading costs and are willing to pay a premium for access to formal and informal research. Formal and informal research account for roughly half of the value generated by brokers. Lastly, we use our model to investigate soft-dollar arrangements, where research and execution services are bundled, and find that such arrangements allow hedge funds and mutual funds to underreport management fees by 10%.

Keywords

Financial Intermediation; Institutional Investors; Research Analysts; Broker Networks; Equity Trading; Institutional Investing; Financial Services Industry

Citation

Di Maggio, Marco, Mark Egan, and Francesco Franzoni. "The Value of Intermediation in the Stock Market." Harvard Business School Working Paper, No. 20-016, August 2019. (Revised June 2021. Accepted at the Journal of Financial Economics.)
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About The Authors

Marco Di Maggio

Finance
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Mark L. Egan

Finance
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Related Work

    • Forthcoming
    • Journal of Financial Economics

    The Value of Intermediation in the Stock Market

    By: Marco Di Maggio, Mark Egan and Francesco Franzoni
Related Work
  • The Value of Intermediation in the Stock Market By: Marco Di Maggio, Mark Egan and Francesco Franzoni
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