Sell-Side Research and Buy-Side Agency Issue

Abstract

We study whether and how sell-side research affects the agency issue between asset managers and their clients. We show that even if sell-side research alone does not generate conflicts of interest, it can exacerbate the moral hazard problem of asset managers. Imposing transparency on the use of sell-side research, as the recent regulation MiFID II does, helps investors alleviate this negative effect. Forcing the managers to absorb sell-side research costs has a similar effect. Our model explains the empirical findings on how transparency affects the supply of buy-side research, the demand for and the quality of sell-side research. This paper contributes to improving the organization of the asset management industry and the debate on recent regulations on sell-side research.