The unintended consequence of the unbundling regulation of MiFID II on the liquidity of European listed companies

In this thesis, the relation between the implementation of MiFID II, analyst coverage, and market liquidity is empirically examined. Over the period 2015 – 2019, the effects of the unbundling regulation were tested in 3,540 European listed firms. The number of analysts covering a company was observed by dynamic and static variables. The variables indicating market liquidity are effective spread and volume traded. This thesis concludes that over the period 2016 – 2018, a decrease in analysts following European listed companies was observed. Moreover, this effect is the most observable for small and large capitalisation companies. This is in line with what is argued by market professionals and previous literature. The second part of this thesis elaborates on the effects of the decrease in analyst coverage on market liquidity indicators. In this part, it is concluded that there is a negative effect of the decrease in analyst coverage on the market liquidity. A negative relation between analyst coverage and effective spread and a positive relation to volume traded was found. This indicates that when analyst coverage decreases, the spread becomes wider and volume traded is less. This relation became stronger closer to the official implementation date of the MiFID II. The main goal of the MiFID II is to improve market transparency and efficiency. Transparency for investors has been improved, but efficiency seems to not have been improved. The results in this thesis suggest a positive relation between analyst coverage and market liquidity during the implementation of MiFID II. This suggests that the unbundling regulation has an unintended consequence on analysts covering European listed companies. This decrease in coverage reduces information to the market and therefore lowers the efficiency of the European financial stock exchanges.