Is There Investment Value in Soft Dollar Arrangements? Evidence from Mutual Fund Commission Allocations

Using novel biographical data on the industry work experience of analysts employed by brokerages, we provide first evidence that mutual funds obtain valuable investment ideas through soft-dollar arrangements.  We show that funds allocate higher commissions to brokerages with industry experienced analyst coverage on portfolio holding firms; they generate higher abnormal returns and exhibit a modest bias on these stocks.  For identification, we exploit disruptions to research coverage emanating from turnover, retirements, deaths and brokerage mergers. Analysts with longer industry experience, connections to covered firms’ management, and those who cover firms moving more synchronously with industry fundamentals or with poor information environments confer greater benefits.