Sell-side analyst coverage of European companies dropped “significantly” since MiFID II

Sell-side analyst coverage of European companies has dropped “significantly” since the implementation of MiFID II, new research from Cass Business School has found.

The Markets in Financial Instruments Directive (MiFID II) was legislated in European law in January 2018.   It requires asset managers and brokers to unbundle the cost of investment research and advisory services from the other services that they provide.

In the working paper The Effects of MiFID II on Sell-Side Analysts, Buy-Side Analysts, and Firms, the researchers examined the effects of this new regulation on all public firms headquartered in European Economic Area (EEA) countries from February 2015 to February 2019.

They found a significant decrease in sell-side analysts covering European firms since the implementation of MiFID II, with 334 firms losing their analyst coverage completely.  The analysts who dropped coverage had higher lifetime forecast errors, higher forecast optimism, less experience on the job and less experience covering the firm that dropped.

More positively, the researchers found the stock recommendations issued by the remaining sell-side analysts are more profitable and gain greater market reactions, and sell-side analysts cater more to the buy-side by providing industry recommendations along their stock recommendations. Buy-side investment firms also used more in-house research after MiFID II with analysts increasing their participation and engagement in earnings conference calls.

There was also evidence that firms increased their disclosure activities following MiFID II and that stock-market liquidity decreased, after taking into account firms’ disclosure responses and changes in analyst coverage.

Co-author Dr Zhongwei Huang, Cass Business School, said the research has implications beyond Europe.

“MiFID II represented a shake-up of traditional business practices in Europe and has polarised opinion, with some industry figures being highly critical of its introduction.  We should not be surprised that such sweeping regulatory changes have had such a mixed impact.

“It will now be interesting to watch what happens in the United States where investors are currently pressuring the Securities and Exchange Commission (SEC) to adopt similar regulation.”

Read the paper

Read The Effects of MiFID II on Sell-Side Analysts, Buy-Side Analysts, and Firms here.  The authors are Bingxu Fang, Rotman School of Management; Ole-Kristian Hope, Rotman School of Management; Zhongwei Huang, Cass Business School and Rucsandra Moldovan, John Molson School of Business.