Expense Shifting:
An Empirical Study of Agency Costs in the Mutual Fund Industry
Nicolaj Siggelkow
Management Department
Wharton School
2017 Steinberg Hall – Dietrich Hall
University of Pennsylvania
Philadelphia, PA 19104
siggelkow@wharton.upenn.edu
tel: (215) 573-7137
fax: (215) 898-0401
Abstract: Using a data set comprising almost all equity and bond funds in existence in 1996, we find that
fund providers shift advertising and distribution expenses via so-called 12b-1 fees onto fund shareholders.
It is further shown that bond funds with 12b-1 fees are more risky, while having similar returns, than
bond funds without 12b-1 fees. Lastly, we find that fund providers shift part of their research expenses
onto fund shareholders by generating soft dollars (rebates in form of research services provided by brokers
in return for excess commissions paid by fund providers) and not reducing explicit fees.
Keywords: Mutual Funds, Agency Costs, 12b-1 Fees, Soft Dollars
JEL classification: G23, D23, D82, L14
Draft Date: January 4, 1999
I would like to thank Pankaj Ghemawat, Witold Henisz, Anne Marie Knott, Bruce Kogut, Daniel Levinthal, Michael
Porter, Adrian Tschoegl, and Joel Waldfogel for helpful comments.
1
1. Introduction
Starting with the seminal work of Jensen and Meckling (1976), the principal-agent problem has
found considerable attention in both the empirical and theoretical literature on the economics of
organizations. For instance, the incentives of managers rather than the benefits to shareholders
appear to drive the decisions with respect to firm acquisitions, asset sales, and takeover resistance
(e.g., Morck, Shleifer, and Vishny, 1990; Lang, Poulsen, and Stulz, 1995; Walking and Long,
1984). Similarly, contractual arrangements and ownership structures in various franchise and retail
settings have provided corroborating, if yet indirect, evidence for moral hazard problems. In these
studies, moral hazard is inferred from the particular organizational choices rather than being
directly observed (e.g., Brickley an