Informational effects of MiFID: the case of equity analysts

We conduct an event study spanning the period from 2004 to 2013 to examine the information content of financial analysts' stock recommendation revisions before and after implementation of the European Markets in Financial Instruments Directive in 2007 (MiFID). We find that, compared to the pre-MiFID period, stock recommendations issued by investment bank analysts are more informative in the post-MiFID period. Further, exploiting a difference in how MiFID addresses analyst-specific conflicts of interest, we show that MiFID has widened the gap in informational content between recommendations issued by investment bank analysts and those issued by independent brokerage firm analysts, with the former having significantly higher stock price impact than the latter. Overall, our findings suggest that investors perceive MiFID as effective in mitigating biases in investment bank analysts' research and that investors are well aware of remaining adverse incentives facing independent analysts, and discount their recommendations accordingly.