The effects of MiFID II on sell-side analysts, buy-side analysts, and firms
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The effects of MiFID II on sell-side analysts, buy-side analysts, and firms Bingxu Fang 1 & Ole-Kristian Hope 1,2 Rucsandra Moldovan 4
& Zhongwei
Huang 3 &
# Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper provides early but broad empirical evidence on MiFID II, which requires investment firms to unbundle investment research from other costs they charge to clients. Employing 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 inhouse research after MiFID II implementation. Equally interesting, buy-side analysts increase their participation and engagement in earnings conference calls, compared to the control group. We find some evidence that stock-market liquidity decreases post MiFID II. Keywords MiFID II . Financial services . Sell-side analysts . Buy-side research .
Unbundling . Hard dollar . Europe JEL Classification G00 . G15 . G30 . G34 . G38 . K00 . L50 . M10 . M20 . M40 . M41 . M48 .
M49
* Ole-Kristian Hope [email protected] Bingxu Fang [email protected] Zhongwei Huang [email protected] Rucsandra Moldovan [email protected] Extended author information available on the last page of the article
B. Fang et al.
1 Introduction The Markets in Financial Instruments Directive II (MiFID II) is a financial services directive that became effective in the European Union on January 3, 2018.1 MiFID II applies to the 31 countries of the European Economic Area (EEA), which comprises the 28 EU members plus Iceland, Liechtenstein, and Norway. One of the important changes set forth by MiFID II is the requirement for asset managers and broker-dealers to unbundle the cost of investment research and advisory services from the cost of trade execution. In other words, the information presented to the client must separately and transparently show all the different costs and charges, including any third-party payments, as well as justify how external research contributes to better investment decisions so that it is not considered an inducement (PwC 2016). In this study, we provide early—but broad—empirical evidence on the effects of this sweeping new regulation on sell-side analyst research and buy-side research. The requirements to unbundle research costs and justify the usefulness of external research create a unique opportunity to empirically examine a mechanism that, on one hand, addresses trading incentives as a conflict of interest a
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