Empirical evidence from European equity research
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School of Business |
Master's thesis
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Date
2020
Department
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Mcode
Degree programme
Finance
Language
en
Pages
67 + 5
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Abstract
This thesis examines how the unbundling requirement of sell‐side equity research introduced by the MiFID II directive affects the output, market reactions and production environment of sell‐side research in Europe. Whereas previously sell‐side research could be offered to institutional investors or other clients as an auxiliary service to trading or investment banking mandates, MiFID II forbids assets managers from accepting services without an explicit price tag. These changes have an integral link to an increase in asymmetric information and a change in research consumption patterns. This thesis shows that this fundamental change in sell-side research pricing structure resulted in a consolidation of information in the market and a decrease in stock market liquidity in Europe. Due to the recency of the directive, implemented in early 2018, very limited published research on the implications of MiFID II exists. The key contribution of this thesis is to analyze whether the much‐critiqued directive had the desired outcomes to the quantity and quality of sell‐side analyst research in Europe, as well as whether the new legislative environment resulted in improved market transparency and liquidity. Furthermore, this thesis has implications for wider research regarding the value of equity research, analyst incentives, market reactions to the introduction of new regulations and implications of fee bundling and other pricing change to buyer behavior. Using a difference‐in‐differences research design, I explore the impact of MiFID II to the quantity and accuracy of announced analyst estimates on European companies, the capital market reactions following issued estimates on a two‐day event window, market liquidity of affected firms and changes in analyst employment in affected brokerages. I employ a three‐tiered dataset for European and US sample groups from I/B/E/S and Thomson Reuters Datastream. The results show that following the implementation of the directive, the information environment for European companies weakened. Sell-side coverage of European companies decreased 5.3% relative to the US control group while estimate accuracy did not significantly improve. Correspondingly, the number of analysts employed by European brokerages decreased by 11.6%. The decreased amount of information in the market resulted in a 12.4% decline in liquidity for the affected companies, while also larger market reactions followed the remaining analyst estimates as the total amount of information decreases. These results imply that MiFID II resulted in a consolidation of supply of information to markets and a decrease in stock market liquidity. Thus, the directive did not fully succeed in its plans to improve market transparency, competitiveness and investor protection in the European financial markets.Description
Thesis advisor
Torstila, SamiKeywords
equity research, MiFID II, unbundling, sell-side analysts, liquidity, transparency, asymmetric information, analyst incentives