Does Local Competition and Firm Market Power Affect Investment Adviser Misconduct?

This paper examines the impact of local competition and local firm market power on misconductby analyzing the investment adviser market. The study is based on an extensive sample of morethan 3.8 million employee-year observations of investment advisers resulting in 709,416 firmcounty-year observations over 12 years. The findings show that a firm’s county-level marketpower and county market competition have a negative influence on investment advisermisconduct. The result is robust to a battery of empirical tests. We show that a firm exhibits lowerlevels of misconduct in counties in which it has greater local market power. We also identify theeffect of local competition and market power on misconduct using two exogenous shocks, mergersand acquisitions (M&As) and the end of a local monopoly. We establish adviser employmentstability as a novel channel for explaining the impact of local competition and firm market poweron misconduct.