MiFID II and the unbundling of analyst research from trading execution

Abstract

AbstractThe revised Markets in Financial Instruments Directive (MiFID II) requires the unbundling of research payments from trading execution, fundamentally changing the way in which investors typically pay for analyst research in Europe. We examine the effectiveness of the regulation in changing the link between analyst research and trading, the research‐trading link, and the analyst response to this potential change in incentives. Using a difference‐in‐differences research design, we find that forecast frequency, optimism, and accuracy are less associated with the brokerage trading share after MiFID II, suggesting that MiFID II weakened the link between the brokerage share of trading and analyst research. Following MiFID II, analysts in Europe are less likely than analysts in the United States to continue high forecast frequency, optimism, and accuracy for stocks with high share importance for the analyst's brokerage house. We find similar results throughout for buy/sell recommendations. Overall, our evidence suggests that MiFID II is at least partially successful in unbundling research from execution, and impacts both the trading effects and the production of analyst research.