More from these Authors

• Working Paper | HBS Working Paper Series | 2019

  The Value of Intermediation in the Stock Market

  Marco Di Maggio, Mark Egan and Francesco Franzoni

  Brokers continue to play a critical role in intermediating institutional stock market transactions. More than half of all institutional investor order flow is still executed by high-touch (non-electronic) brokers. Despite the continued importance of brokers, we have limited information on what drives investors' choices among them. We develop and estimate an empirical model of broker choice that allows us to quantitatively examine each investors' responsiveness to execution costs and access to research and order flow information. Studying over 300 million institutional trades, we find that investor demand is relatively inelastic with respect to commissions and that investors are willing to pay a premium for access to top research analysts and order-flow information. There is substantial heterogeneity across investors. Relative to other investors, hedge funds tend to be more price insensitive, place less value on sell-side research, and place more value on order-flow information. Furthermore, using trader-level data, we find that investors are more likely to trade with traders who are located physically closer and are less likely to trade with traders that have misbehaved in the past. Lastly, we use our empirical model to investigate the unbundling of equity research and execution services related to the MiFID II regulations. While under-reporting for the average firm is relatively small (4%), we find that the bundling of execution and research allows some institutional investors to under-report management fees by up to 15%.

  Keywords: financial intermediation; Institutional investors; research analysts; 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.  View Details

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• Article | Journal of Finance | June 2019

  Brokers vs. Retail Investors: Conflicting Interests and Dominated Products

  Mark Egan

  I study how brokers distort household investment decisions. Using a novel convertible bond dataset, I find that consumers often purchase dominated bonds—cheap and expensive versions of otherwise identical bonds coexist in the market. The empirical evidence suggests that broker incentives are responsible for the inferior investments, as brokers earn a 1.12 percentage point higher fee relative to the notional invested for selling the dominated bond on average. I develop and estimate a broker intermediated search model that rationalizes this behavior and quantifies the distortions in these markets. In the model, consumer search is endogenously directed according to the incentives of brokers, and brokers price discriminate based on a consumer's level of sophistication. The model estimates indicate that costly search is a key friction in retail financial markets, but the effects of search costs are compounded when brokers are incentivized to direct the search of consumers towards high fee inferior products.

  Keywords: Brokers; Fiduciary Standard; consumer finance; structured products; Household; Investment; Decisions; Motivation and Incentives; Conflict of Interests;

  Citation:

  Egan, Mark. "Brokers vs. Retail Investors: Conflicting Interests and Dominated Products." Journal of Finance 74, no. 3 (June 2019): 1217–1260.  View Details

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• Case | HBS Case Collection | April 2018 (Revised March 2019)

  Tesla-SolarCity

  E. Scott Mayfield and Emil N. Siriwardane

  On June 21, 2016, Tesla Motors, Inc. announced its offer to acquire SolarCity, bringing CEO Elon Musk one step closer to completing his goal of moving the world from a hydrocarbon-based economy to a solar-electric one. Markets and analysts were mixed in their reaction to the announcement; some thought the deal would be a distraction to Tesla management at a critical time; others thought it was a “bailout” of SolarCity. Following weeks of due diligence, Tesla and SolarCity finalized their merger agreement and worked to justify the transaction. Joan Banister, a financial advisor, must prepare to address her clients’ concerns about their various financial positions in Tesla and SolarCity.

  Keywords: Tesla; SolarCity; solar power; Mergers and Acquisitions; Renewable Energy; Goals and Objectives; Finance;

  Citation:

  Mayfield, E. Scott, and Emil N. Siriwardane. "Tesla-SolarCity." Harvard Business School Case 218-108, April 2018. (Revised March 2019.)  View Details

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