Analyst Incentives and Stock Return Synchronicity : Evidence from MiFID II

We study the role of analyst incentives in the overall information environment in the stock market, focusing on the fundamental changes brought by MiFID II on the sell-side research industry in Europe. Implemented in 2018, MiFID II substantially changed analyst incentives, forcing them to work harder to justify the value they add. We find that, while the number of analysts decreases, the average stock return synchronicity with the market also decreases, implying an improvement in stock price informativeness. The decrease in synchronicity is larger for firms that are likely to be more important for the analysts and brokers covering them. It is also asymmetric and substantially larger for downside market movements. Similarly, stock price crash risk decreases following the introduction of MiFID II. These results indicate that both systematic and idiosyncratic downside risk components in firm returns decrease. We also find that consensus earnings estimates become more accurate following MiFID II. Our results suggest that, by changing incentives, MiFID II not only improves the quality of individual analyst work, as reported by prior studies, but also achieves an improvement in the aggregate information environment with fewer analysts producing this information