Regulating the Financial Analysis Industry: Is the European Directive Effective?

58 Pages Posted: 13 Oct 2008 Last revised: 14 May 2011

See all articles by Michel Dubois

Michel Dubois

University of Neuchatel - Institute of Financial Analysis

Pascal Dumontier

University of Grenoble

Date Written: October 10, 2008


Recent years have witnessed the adoption of new laws regulating the financial analyst profession in the US. The EU followed by passing the Market Abuse Directive and two subsequent Directives in 2003. Were these Directives necessary and did they reach their target? We first analyze whether analysts changed the distribution of the recommendations levels. Then, we examine how the stock price impact of recommendations changed after the directives were passed. Finally, we check whether the EU regulation was useful given the anteriority of the US regulation. We use recommendations issued on firms of thirteen European countries from 1997 to 2007. We find that favourable recommendations significantly decreased and, to a lesser extend, that the proportion of "Sell" recommendations increased after MAD was passed. MAD did not completely eliminate optimistic recommendations issued by financial institutions facing conflicts of interest. We confirm that financial institutions with a reputation capital at stake are less prone to optimism. Due to differences in investor's protection, we document that CARs were different across countries before MAD and that the market reaction was stronger for upgrades and positive initiations afterwards. Conflicts of interest did not affect significantly cumulated abnormal returns around "Upgrades" and positive initiations, either pre-MAD or post-MAD. Conversely, "Downgrades" issued by analysts facing conflicts of interest generate more negative abnormal returns either pre-MAD or post-MAD. Considered together, these results suggest that investors were able to discount optimistic recommendations. We also find that reputation act as a factor moderating conflicts of interest either before or after MAD. Finally, the proportion of positive (negative) recommendations issued on European firms decreased (increased) after the US laws were passed. However, cumulated abnormal returns did not change until MAD was adopted.

Keywords: financial analysts, conflicts of interest, recommendations, Market Abuse Directive, European Union.

Suggested Citation

Dubois, Michel and Dumontier, Pascal, Regulating the Financial Analysis Industry: Is the European Directive Effective? (October 10, 2008). AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI, Available at SSRN: or

Michel Dubois (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel, 7
Neuchatel, 2000
41 32 718 13 66 (Phone)
41 32 718 13 61 (Fax)

Pascal Dumontier

University of Grenoble ( email )


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