The Effects of MiFID II on Sell-Side Analysts, Buy-Side Analysts, and Firms
62 Pages Posted: 18 Jul 2019
Date Written: May 20, 2019
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: Suggested Citation