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

62 Pages Posted: 18 Jul 2019

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 20, 2019

Abstract

This paper provides early but comprehensive empirical evidence on a major new investor protection regulation in Europe, MiFID II, which requires investment firms to unbundle the costs they charge to clients. Specifically, MiFID II requires asset managers and broker-dealers to unbundle the cost of investment research and advisory services from other services they provide. We examine the effects of this new regulation in difference-in-differences matched-sample research designs with firm fixed effects and test for numerous potential outcomes. We find a decrease in the number of sell-side analysts covering European firms after MiFID II implementation. For example, 334 firms completely lose their analyst coverage. On average, the analysts who dropped coverage have higher lifetime forecast errors, higher forecast optimism, less experience on the job, and less experience covering the firm dropped. We do not find significant changes in consensus forecast errors or dispersion. However, the remaining analysts are more likely to make sell or hold stock recommendations, their recommendation revisions garner greater market reactions, and their recommendations are more profitable. 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 find evidence that buy-side investment firms turn to more in-house research after MiFID II implementation. Especially 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 (after taking into account firms’ disclosure responses and changes in analyst coverage). 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 20, 2019). 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

Register to save articles to
your library

Register

Paper statistics

Downloads
528
Abstract Views
1,823
rank
52,105
PlumX Metrics