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Transaction cost unbundling and investors’ reliance on investment research: Evidence from experimental asset markets

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  • Stirnkorb, Sebastian

Abstract

Broker-dealers traditionally charge their clients for the provision of investment research with a composite fee that bundles payments for research with other variable fees, such as those for trade executions. Due to regulatory changes in Europe, US broker-dealers temporarily allowed some of their clients to pay an explicit fee for the provision of investment research. Drawing on the sunk cost literature, I examine how transaction cost unbundling influences investors’ reliance on investment research. Results from 16 experimental markets indicate that investors place greater weight on costly forecasts under a system of unbundled payments compared to bundled payments, but only if transaction costs are sufficiently high, which is consistent with the dynamics of a sunk cost fallacy. I find marginal evidence that the enhanced focus on the forecast further inhibits investors' learning, as reflected in a slower reduction of price errors over time. These results are important since investors worldwide are increasingly paying explicit charges for investment research, a trend reinforced by a recent SEC policy change.

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  • Stirnkorb, Sebastian, 2024. "Transaction cost unbundling and investors’ reliance on investment research: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:aosoci:v:112:y:2024:i:c:s0361368224000023
    DOI: 10.1016/j.aos.2024.101542
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    More about this item

    Keywords

    Transaction costs; Unbundling; Sunk cost fallacy; Investor judgment and decision making; Experimental markets; MiFID II;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G1 - Financial Economics - - General Financial Markets
    • G4 - Financial Economics - - Behavioral Finance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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