The Effects of MiFID II on Sell-Side Analysts, Buy-Side Analysts, and Firms

61 Pages Posted: 18 Jul 2019 Last revised: 8 May 2020

See all articles by Bingxu Fang

Bingxu Fang

University of Toronto, Rotman School of Management

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Zhongwei Huang

Cass Business School, City, University of London

Rucsandra Moldovan

John Molson School of Business, Concordia University

Date Written: May 8, 2020

Abstract

This paper provides early but broad empirical evidence on a major new investor protection regulation in Europe, MiFID II, which requires investment firms to unbundle investment research from other costs they charge to clients. We predict that the price separation resulting from unbundling and a hard-dollar system leads to a shrinking of the market for sell-side investment research, manifested in lower quantity of sell-side coverage that is of higher quality than before the regulation. We test our predictions in difference-in-differences matched-sample research designs with firm fixed effects. We find a decrease in the number of sell-side analysts covering European firms after MiFID II implementation, particularly for firms that are less important to the sell-side. However, research quality improves; specifically, individual analyst forecasts are more accurate and stock recommendations garner greater market reactions. In addition, sell-side analysts seem to cater more to the buy-side after MiFID II by providing industry recommendations along with stock recommendations. Importantly, we predict and find evidence that buy-side investment firms turn to more in-house research after MiFID II implementation. Equally interesting, buy-side analysts increase their participation and engagement in earnings conference calls compared to the control group. Finally, we find some evidence that stock-market liquidity decreases post-MiFID II. Our findings have implications beyond Europe, as investors are currently pressuring the U.S. Securities and Exchange Commission to adopt a similar regulation.

Keywords: MiFID II, regulation, financial services, sell-side analysts, buy-side research, disclosure, liquidity, international

JEL Classification: G00, G15, G30, G34, G38, K00, L50, M10, M20, M40, M41, M48, M49

Suggested Citation

Fang, Bingxu and Hope, Ole-Kristian and Huang, Zhongwei and Moldovan, Rucsandra, The Effects of MiFID II on Sell-Side Analysts, Buy-Side Analysts, and Firms (May 8, 2020). Rotman School of Management Working Paper No. 3422155, Available at SSRN: https://ssrn.com/abstract=3422155 or http://dx.doi.org/10.2139/ssrn.3422155

Bingxu Fang

University of Toronto, Rotman School of Management ( email )

105 St George St
Toronto, ON M5S 3E6
Canada

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Zhongwei Huang

Cass Business School, City, University of London ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Rucsandra Moldovan

John Molson School of Business, Concordia University ( email )

Montreal, Quebec H3G 1M8
Canada
+1-514-848-2424 ext 2528 (Phone)

HOME PAGE: http://https://sites.google.com/site/rucsandramoldovan

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