The Effect of Transaction Cost Unbundling on Investors' Reliance on Investment Research : Evidence from Experimental Asset Markets

Recent regulatory changes within Europe (regulation MiFID II) mandate broker-dealers to charge clients explicitly for any investment research they provide. This new mandate replaces the common practice of bundling these charges with other variable fees, such as those for trade executions. Drawing on transaction decoupling theory, 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 to provoke feelings of regret. Focusing on the forecast, investors also cede to reduce price errors over time. Additional analysis suggests that salient cost disclosure, a more cost-effective way to generate transparent transaction costs, does not similarly impact investor judgment. These results are important in light of recent SEC discussions on how to respond to Europe’s regulatory push for cost transparency