Regulation and Stock Market Quality: The Impact of MiFID II Provision on Research Unbundling

Abstract

This paper investigates the effects produced by the unbundling of analyst research costs required by MiFID II on market quality, as measured by stock liquidity and price efficiency. We find that the payment of an explicit price for research is associated with a reduction in analyst coverage in the EU. Unexpectedly, the reduction is stronger for large-cap stocks. For mid- and large-cap stocks analyst coverage in the EU is still greater than in the US. The reduction in analyst coverage observed in the EU is part of a downward trend that initiated prior to MiFID II and contributes to close the gap between the two regions. We also find no change in the bid-ask spread for small-, mid- and large-cap stocks, and a slight increase for micro-cap stocks. We observe no significant change in price efficiency. Taken together our findings seem to suggest that there was an overproduction of research in Europe with the previous regulatory regime. However, the growth of passive management and index funds may also explain the observed decrease in coverage.

Keywords: MiFID II, Analyst coverage, Sell-side research

JEL Classification: G14, G24, G28