Charge Higher Fees Research Articles

The Role of Agents in Private Finance

In this paper we examine for the first time the role of agents in private-market entrepreneurial financings. After controlling for the endogenous issuer-agent matching and a whole host of other potential determinants, the empirical findings in this paper indicate that agents attract more investors, broaden the geographic investor and capital base, and increase the percentage of investors and capital from investors that are most vulnerable to the costs of information asymmetry. We also find that more reputable agents generally provide a higher quality service than less reputable agents, and consequently charge higher fees. Our findings provide strong support for the certification and networking role of agents in the private entrepreneurial financing market, and no support for the idea that agents use their market power to take advantage of private entrepreneurial firms.

The Geography of Hedge Funds

This article analyzes the relationship between the risk-adjusted performance of hedge funds and their proximity to investments using data on Asia-focused hedge funds. I find, relative to an augmented Fung and Hsieh (2004) factor model, that hedge funds with a physical presence (head or research office) in their investment region outperform other hedge funds by 3.72% per year. The local information advantage is pervasive across all major geographical regions, but is strongest for emerging market funds and funds holding illiquid securities. These results are robust to adjustments for fund fees, serial correlation, backfill bias, and incubation bias. I show also that distant funds, especially those based in the United States and the United Kingdom, are able to raise more capital, charge higher fees, and set longer redemption periods, despite their underperformance relative to nearby funds. It appears that distant funds trade investment performance for better access to capital. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Do the Best Hedge Funds Hedge?

We provide a simple argument that suggests that better informed hedge funds choose to have less exposure to factor risk. Consistent with this argument we find that hedge funds that exhibit lower R-squares with respect to systematic factors have higher Sharpe ratios, higher information ratios, charge higher fees and attract more future inflows.

The Geography of Hedge Funds

This paper analyzes the relationship between the risk-adjusted performance of hedge funds and their proximity to investments using data on Asian-focused hedge funds. We find, relative to an augmented Fung and Hsieh (2004) factor model, that hedge funds with a physical presence (head or research office) in their investment region outperform other hedge funds by 3.72 percent per year. The local information advantage is pervasive across all major geographical regions, but is strongest for Emerging Market funds and funds holding illiquid securities. These results are robust to adjustments for fund fees, serial correlation, backfill bias, and incubation bias. We show also that distant funds, especially those based in the U.S. and the U.K., are able to raise more capital, charge higher fees, and set longer redemption periods, despite their underperformance relative to nearby funds. It appears that distant funds trade investment performance for better access to capital.

The Larkin Clubs of Ten: Consumer Buying Clubs and Mail-Order Commerce, 1890–1940

The direct selling industry has a long history, with roots snaking back to the nineteenth-century “Yankee peddlers” who roamed the countryside selling tools, teas, and liniments door-to-door. Its reputation has suffered from the prevalence of misleading and illegal schemes such as pyramids, which generate income by paying money or other compensation solely for the act of recruiting, charge high entrance fees, and sell products of questionable value. Nonetheless, some advocates note that direct sales work, which often involves family and flexible working hours, has provided an excellent alternative to the traditional bureaucratic employment relationship that has historically been less receptive to women.

The Larkin Clubs of Ten: Consumer Buying Clubs and Mail-Order Commerce, 1890–1940

The direct selling industry has a long history, with roots snaking back to the nineteenth-century “Yankee peddlers” who roamed the countryside selling tools, teas, and liniments door-to-door. Its reputation has suffered from the prevalence of misleading and illegal schemes such as pyramids, which generate income by paying money or other compensation solely for the act of recruiting, charge high entrance fees, and sell products of questionable value. Nonetheless, some advocates note that direct sales work, which often involves family and flexible working hours, has provided an excellent alternative to the traditional bureaucratic employment relationship that has historically been less receptive to women.

Agency Costs, Governance, and Organizational Forms: Evidence from the Mutual Fund Industry

Using a comprehensive sample of mutual funds and fund families for the period 1992-2004, this paper examines the impact of fund management companies' organizational forms on the level of agency costs observed within mutual funds. We find that, all else being equal, (1) funds managed by public fund families charge higher fees than those managed by private fund families; (2) public fund families are more likely to be implicated in the recent fund scandals; (3) public fund families acquire more funds than private fund families; and (4) funds of public fund families significantly underperform funds of private fund families. Collectively, these findings suggest that agency costs are higher in mutual funds managed by public fund families. Our results are consistent with the idea that the agency conflict between the fund management company and fund shareholders is more acute for public management companies because of their shorter-term focus.

Closing and Cloning in Mutual Funds

We investigate mutual funds' decision to shut out new investors. We first document that only those closed funds that do not subsequently launch new funds can continuously deliver significantly positive objective- and size-adjusted returns up to six months after the closure. This suggests the existence of optimal fund scale. However, in spite of the potential diseconomies of scale, a non-trivial proportion of closed funds subsequently clone new funds in the same investment objective. One potential explanation for this finding is that closed funds use closures to stand out from the crowd in a highly competitive industry. When managers of closed funds clone new sibling funds, they receive greater public attention and thus can attract more fund flows and/or charge higher fees. We find that the average median-adjusted expense ratios of cloned funds are 12 basis points higher than the corresponding closed funds in the same investment objective. Furthermore, closed fund managers can attract more fund flows to their new sibling funds, making the closure an effective non-performance-based mechanism to extract more economic rents. In addition, we find that fund managers do not implement different strategies before and after a closure. Overall, we find that closing and cloning is an attractive strategy for smaller funds, funds that seek to increase their management fees, and funds with more junior managers in place.

Comments on Richard Zeckhauser's Investing in the Unknown and Unknowable

Comments on Richard Zeckhauser's Investing in the Unknown and Unknowable

Performance Persistence in Institutional Investment Management

Using new, survivorship-bias free data, we examine performance persistence in 6,260 institutional portfolios managed by 1,475 investment management firms between 1991 and 2004. Unlike retail mutual funds, persistence in winner domestic equity portfolios is significant and economically large for up to one year. Loser portfolios, conversely, do not persist. International portfolios exhibit similar patterns, and fixed income portfolios persist up to three years. We find that better-performing portfolios offer performance-based fees and most-favored-nation clauses more often, but also charge higher fees. The magnitude of fees is insufficient to eliminate excess returns. Top performers draw an influx of assets from plan sponsors, and in the year following such inflows, alphas sharply decline.

Investment Bank Reputation and the Price and Quality of Underwriting Services

ABSTRACTThe relation between investment bank reputation and the price and quality of bond underwriting services is studied here. After controlling for endogeneity in issuer–underwriter matching, I find that reputable banks obtain lower yields and charge higher fees, but issuers' net proceeds are higher. These relations are pronounced in the junk‐bond category, in which reputable banks' underwriting criteria are most stringent. These findings suggest that banks' underwriting decisions reflect reputation concerns, and are thus informative of issue quality. They also suggest that economic rents are earned on reputation, and thereby provide continued incentives for underwriters to maintain reputation.

Interlinking Securities Settlement Systems: A Strategic Commitment?

Central securities depositories (CSDs) have opened mutual links, but most of them are seldom used. Why are idle links established? By allowing a foreign CSD to offer services through the link the domestic CSD invites competition. The domestic CSD can determine the cost efficiency of the rival by charging suitable fees, and prevent it from becoming more competitive than the domestic CSD. By inviting the competitor the domestic CSD can commit itself not to charge monopoly fees for secondary market services. This enables the domestic CSD to charge high fees in the primary market without violating investors' participation constraints.

Relationship Rating: How Do Bond Rating Agencies Process Information?

The level of interaction between bond rating agencies and firms they rate varies substantially cross-sectionally. For instance, many bond ratings are solicited by bond issuers, resulting in a relationship between the firm and the rating agencies they hire. But other bond ratings are unsolicited, whereby there is generally no interchange of information between firm and agency, other than that which is already public. We examine the production of soft versus hard information by these non-bank intermediaries by studying the fees they charge firms they rate. We employ rating fees as a proxy for the effort exerted by credit analysts and find that when agencies charge higher fees, they rely less on publicly available hard information. We thus infer that these more costly ratings reflect an assessment of soft information about bond issuers. Our results are less consistent with fee variation due to extortion or rating shopping.

Education in the New China: Shaping Ideas at Work. By Yvonne Turner and Amy Acker. [Aldershot, Hampshire: Ashgate, 2002. viii + 247 pp. £42.50. ISBN 0-7546-1914-1.

This volume explores a new and little understood facet of Chinese education – the development of private colleges which recruit students outside the public higher education system. These institutions typically charge high fees and emphasize fields of knowledge such as business and foreign languages, which may help graduates find their way into China's thriving ‘new’ economy.

"Rip-Off" ATM Surcharges

We develop a spatial model in which we endogenize both the pricing of ATM services by banks and the choice of home bank and ATM use by consumers. The equilibrium delivers the empirical regularities: Banks set high bank account fees for their own customers, but do not charge them for ATM usage; in contrast, banks charge high ATM fees for non-member users, fees that exceed those levels that would maximize ATM revenues from non-members; and larger banks set higher account fees and demand higher surcharges for ATM use than smaller banks. Paradoxically, (i) A bank's ATM revenues may fall short of its costs of ATM provision; and (ii) Prohibiting banks from surcharging non-members, by forcing banks to charge members and non-members the same ATM price, leads to higher ATM prices, greater bank profits and possibly reduced consumer welfare.

Strategic Pricing of Underwriting Service: Entrants Versus Incumbents

This paper documents that bank penetration in underwriting market is positively associated with the benefit of commercial bank underwriting, the presence of relationships with clients and firms with middle credit ratings, but negatively associated with issue size and issue maturity. Commercial banks provide discounts on fees to the clients they serve well, consistent with emphasis on gaining market share as entrants. However, they exploit some seemingly captured clients by charging them higher fees. Conversely, investment banks bargain for the underwriting benefits and charge higher fees when the benefits are positive. In responding to the competition of bank entry, incumbents charge a lower fee in the segments with higher bank penetration.

The Price of Law: How the Market for Lawyers Distorts the Justice System

This paper begins with the question, Why do lawyers cost so much? The analysis is an investigation of the imperfections in the market for lawyers, imperfections that have been largely overlooked by focus on either the model of perfect competition or the impact of artificial barriers to entry into the provision of legal services. The paper catalogues multiple sources of imperfection: the nature of the incentives and mechanisms at work to determine the level of complexity in the system; the extent to which complexity and uncertainty make legal services into credence goods par exellence; the winner-take-all and tournament nature of the competition among lawyers; the sunk costs of lawyer-client relationships and hence the potential for opportunism and the limited potential for conventional market mechanisms to control opportunism; the incremental nature of legal fees--which structures legal expenditures as a sunk cost auction in which the cost of services can easily and rationally exceed the amount at stake; and three sources of monopoly--the familiar monopoly established by artificial barriers to entry, the natural monopoly arising from the limited supply of individuals in the economy with the cognitive skills necessary to engage effectively in competitive legal reasoning, and the state's monopoly over coercive dispute resolution. The analysis uncovers deeply disturbing implications for justice from the economics of the market for lawyers. The price dynamics of the system operate within the framework of a unified profession/unified legal system that essentially puts individual clients--with justice interests at stake--into a bidding contest with corporate clients with efficiency (more generally, market) interests at stake. Corporations by definition are aggregations of individual wealth and, as a consequence, are able to bid for the resources; they also are a richer feeding ground for the wealth extraction generated by the imperfections/monopoly aspects of the market for lawyers. This is not an ethical critique of lawyers; it is the implication of ordinary economic response to incentives structured by a non-competitive market. The economic dynamics of the market for lawyers operate like a vacuum, drawing the resources of the system into the corporate sphere, in the service (from a public perspective) of efficiency, and away from the individual sphere, in the service of justice as in the relationships between the individual and the state, the market, the family, the community and so on. This stands on its head the lexicographic relationship between efficiency and justice: efficiency is of normative significance only to the extent it promotes individual welfare through just social relations. The implications of the economic analysis in the paper are supported by the empirical evidence we have about the structure of the legal profession and the changes over the past several decades. The profession is roughly divided into two segments--one serving business clients and one serving individual clients. The business segment is populated by lawyers who graduated from elite institutions, who are well-connected and influential in the profession, who charge high fees and earn high incomes, and who are perceived to be in short supply. These lawyers work in large firms or high-end boutiques and are increasingly likely to be specialized. Their work is perceived to be of the highest level of prestige by all members of the profession. The personal segment is populated by lawyers who graduate from lower-tier schools, charge lower fees and often flat fees set in apparently competitive fashion providing largely routine, non-contested legal services such as house closings, uncontested divorces and wills. Their work is perceived, by them and the rest of the profession, as low prestige. Lawyers in this segment tend to work in solo practice or small general practice firms. The supply of lawyers in this segment is perceived to exceed demand, and there is evidence of un/underemployment and falling prices. The allocation of total hours spent by lawyers on legal work is increasingly skewed towards the business segment of the profession, and thus towards the efficiency and away from the individual justice goals of the justice system.

The Price of Law: How the Market for Lawyers Distorts the Justice System

This paper begins with the question, Why do lawyers cost so much? The analysis is an investigation of the imperfections in the market for lawyers, imperfections that have been largely overlooked by focus on either the model of perfect competition or the impact of artificial barriers to entry into the provision of legal services. The paper catalogues multiple sources of imperfection: the nature of the incentives and mechanisms at work to determine the level of complexity in the system; the extent to which complexity and uncertainty make legal services into credence goods par exellence; the winner-take-all and tournament nature of the competition among lawyers; the sunk costs of lawyer-client relationships and hence the potential for opportunism and the limited potential for conventional market mechanisms to control opportunism; the incremental nature of legal fees--which structures legal expenditures as a sunk cost auction in which the cost of services can easily and rationally exceed the amount at stake; and three sources of monopoly--the familiar monopoly established by artificial barriers to entry, the natural monopoly arising from the limited supply of individuals in the economy with the cognitive skills necessary to engage effectively in competitive legal reasoning, and the state's monopoly over coercive dispute resolution. The analysis uncovers deeply disturbing implications for justice from the economics of the market for lawyers. The price dynamics of the system operate within the framework of a unified profession/unified legal system that essentially puts individual clients--with justice interests at stake--into a bidding contest with corporate clients with efficiency (more generally, market) interests at stake. Corporations by definition are aggregations of individual wealth and, as a consequence, are able to bid for the resources; they also are a richer feeding ground for the wealth extraction generated by the imperfections/monopoly aspects of the market for lawyers. This is not an ethical critique of lawyers; it is the implication of ordinary economic response to incentives structured by a non-competitive market. The economic dynamics of the market for lawyers operate like a vacuum, drawing the resources of the system into the corporate sphere, in the service (from a public perspective) of efficiency, and away from the individual sphere, in the service of justice as in the relationships between the individual and the state, the market, the family, the community and so on. This stands on its head the lexicographic relationship between efficiency and justice: efficiency is of normative significance only to the extent it promotes individual welfare through just social relations. The implications of the economic analysis in the paper are supported by the empirical evidence we have about the structure of the legal profession and the changes over the past several decades. The profession is roughly divided into two segments--one serving business clients and one serving individual clients. The business segment is populated by lawyers who graduated from elite institutions, who are well-connected and influential in the profession, who charge high fees and earn high incomes, and who are perceived to be in short supply. These lawyers work in large firms or high-end boutiques and are increasingly likely to be specialized. Their work is perceived to be of the highest level of prestige by all members of the profession. The personal segment is populated by lawyers who graduate from lower-tier schools, charge lower fees and often flat fees set in apparently competitive fashion providing largely routine, non-contested legal services such as house closings, uncontested divorces and wills. Their work is perceived, by them and the rest of the profession, as low prestige. Lawyers in this segment tend to work in solo practice or small general practice firms. The supply of lawyers in this segment is perceived to exceed demand, and there is evidence of un/underemployment and falling prices. The allocation of total hours spent by lawyers on legal work is increasingly skewed towards the business segment of the profession, and thus towards the efficiency and away from the individual justice goals of the justice system.

Factors influencing the appropriateness of restorative dental treatment: an epidemiologic perspective.

An epidemiology analysis was performed to identify patient and dentist factors influencing over- and undertreatment of restorative services in a sample of insured adults. At baseline, 681 Washington State employees and their spouses, aged 20 to 34 years and residing in the Olympia or Pullman areas, were interviewed by telephone. Oral assessments were conducted to measure personal characteristics, oral disease, and restoration quality. Adults were followed for two years to measure use of restorative services from dental insurance claims. Each adult's baseline and claims data were linked with provider and practice variables collected from the dentist who provided treatment. For overtreatment, 39 percent of adults received one or more replacement restorations in nondecayed teeth with satisfactory fillings at baseline, while 18 percent of adults had one or more restorations placed in teeth with no decay and fillings. An adult's probability of overtreatment was higher if the adult had more fillings at baseline, or if an adult's dentist was younger, had a busy practice, advertised, charged higher fees, had less continuing education, or had a solo practice. For undertreatment, about 16 percent of adults either received no replacement restorations in teeth with unsatisfactory fillings at baseline, or had decayed teeth at baseline that were not filled or crowned. An adult's probability of undertreatment was higher if an adult had less decayed or more missing surfaces at baseline, or if an adult's dentist believed in sharing information with patients, had a busy practice, or reported not placing fillings when radiographic evidence of new caries was present. A minority of adults aged 20 to 34 experienced potential over- or undertreatment of restorative services, which are influenced by both patient and dentist factors.

How Brokers Facilitate Trade for Long-Term Clients in Competitive Securities Markets

In adverse-selection models of security market microstructure, a market maker could enhance efficiency if he or she were willing to sustain short-term trading losses. We show that this desirable activity can be supported as a self-enforcing agreement between broker-dealers and long-lived clients. An implication is that brokers who sustain such losses should charge higher fees to long-term clients for trades where the broker merely receives a commission. This prediction is supported by an analysis of brokerage rates on the Australian Stock Exchange. By contrast, market makers who make trading profits charge lower agency fees to large, long-term clients. Copyright 1995 by University of Chicago Press.