MiFID II unbundling and sell-side analyst research

We examine broad effects of MiFID II, which mandated unbundled pricing of analyst research in the European Union beginning in 2018. We find significant reductions in sell-side analyst following, particularly for firms for which the marginal analyst was less important (larger, older, less volatile firms with greater coverage and more accurate forecasts). High quality analysts (more accurate, experienced, and in positions of seniority) were more likely to leave the sell-side and move to the buy-side, while remaining sell-side analysts increased efforts to make their forecasts more informative (more accurate, more detailed, and more likely to include informative recommendations resulting in larger stock price responses). Firms responded to a loss of sell-side coverage with more frequent, forward-looking, and informative investor relations events, especially for firms that lost the most coverage. Our results support recent theoretical analysis predicting that unbundling had significant implications for sell-side research, buy-side research, and firm responses.