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

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.