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

Abstract

Nimé for excellent research assistance. We are grateful to Drago Sab u, Java software developer, for the application that extracts the conference call participants, and to FactSet for providing the conference call transcripts.

The Effects of MiFID II on Voluntary Disclosure

“…First, we provide evidence about MiFID II, an economically significant reform, contributing to the emerging academic literature as well as providing practical implications. Our paper complements Fang et al (2020), Guo andMota (2021), andLang et al (2021)-which show that MiFID II impacts capital markets through changes in analyst behavior-by focusing firms rather than analysts and how firms' voluntary disclosure also play a role in the new environment. More specifically, our paper shows that managerial guidance can be a major source of information for investors while the informational value of sell-side research may decline in the post-MiFID II period.…”

“…For example, the UK's Financial Conduct Authority finds that the unbundling provision enhanced buy-side firms' accountability and scrutiny over research costs without sacrificing their access to research, resulting in an overall benefit for investors (Financial Conduct Authority, 2019). This accountability and scrutiny over research costs introduced competition to sell-side research, and academic studies have indeed identified positive outcomes of this increased competition-improved quality of sell-side analyst forecasts, most notably enhanced analyst forecast accuracy (Fang et al, 2020;Guo and Mota, 2021;Lang et al, 2021). In addition, Fang et al (2020) find that stock recommendations become more informative and analyst reports are more likely to contain industry recommendations.…”

“…This accountability and scrutiny over research costs introduced competition to sell-side research, and academic studies have indeed identified positive outcomes of this increased competition-improved quality of sell-side analyst forecasts, most notably enhanced analyst forecast accuracy (Fang et al, 2020;Guo and Mota, 2021;Lang et al, 2021). In addition, Fang et al (2020) find that stock recommendations become more informative and analyst reports are more likely to contain industry recommendations. Guo and Mota (2021) show that research quality improves through two channels: (1) lower quality analysts dropping out of the market, and (2) analysts who remain in the sell-side after MiFID II being under greater pressure to produce more valuable, informative, and marketable research reports.…”

“…Academic scrutiny following the actual implementation of MiFID II has not resolved this debate, as they find inconclusive evidence. Three papers, Fang, Hope, Huang, and Moldovan (2020), Guo and Mota (2021), and Lang, Pinto, and Sul (2021), find that both sides of the debate have merit: MiFID II improved sell-side research quality, but it also decreased analyst coverage.…”

“…As a result of these countervailing changes on sell-side research, the aggregate effect on the capital market is mixed: Guo and Mota (2021) do not find significant change in liquidity among EU firms post-MiFID II, while Fang et al (2020) and Lang et al (2021) document deterioration in liquidity and price discovery for those firms. 2 Lourie, Shanthikumar, and Yoo (2021) find that MiFID II weakened the link between brokerage trading share and analyst research, and that MiFID II is at least partially successful in unbundling research from execution, but do not examine potential impacts on firms and their information environments.…”