Brokerage Commisssions and Pre-disclosure Information Environment

Livne, G (2000) Brokerage Commisssions and Pre-disclosure Information Environment. Working Paper. London Business School Accounting Working Paper.

Abstract

This paper contrasts information production and subsequent trading on an individual basis with trading on information produced and distributed by a fullservice broker. Focusing on differential incentives, rather than differential costs, in investigating endogenous information production it is assumed that a broker's objective is to maximize volumebased commissions. It is found that the quality of the broker's signal is increasing in the number of traders the broker informs, whereas the quality of ownproduced private information by investors is declining in their number. Price reaction at the announcement date will be lower for brokerproduced forecast than for ownproduced signals only if the number of traders in the marketplace is sufficiently large and the broker's forecast is sufficiently more accurate. In addition, it is found that trading volume may be an inappropriate measure of predisclosure information environment. The paper also examines implications for investor profits and demonstrates that switching from self gathering to a brokerprovided signal could be beneficial even when the broker's signal is of lower quality.