MiFID II and the Unbundling of Analyst Research from Trading Execution

Abstract

The revised Markets in Financial Instruments Directive, known as MiFID II, requires the unbundling of research payments from trading execution. Using a difference-in-differences research design, we examine whether this regulation impacted the research–trading relation. We find that MiFID II weakened the link between the brokerage share of trading and analyst research. Forecast frequency, optimism, and accuracy are less likely to be associated with the brokerage trading share after MiFID II. These results do not subside in the years following the implementation of the regulation. Analysts appear to respond to these changes. Following MiFID II, analysts in Europe are less likely than analysts in the US to continue high forecast frequency, optimism, and accuracy for stocks with high share importance for the analyst’s brokerage house. We find similar results throughout for recommendations. Overall, our evidence suggests that MiFID II is at least partially successful in unbundling research from execution.

Keywords: MiFID II, Regulation, Sell-Side Analysts, Brokerage Houses, Trading Volume, Commissions, Conflicts of Interest, Incentives, Earnings Forecasts

JEL Classification: G24, D82, M41, M52