ESMA: MiFID II research unbundling: assessing the impact on SMEs

24 February 2021

MiFID II Research Unbundling – impact on EU equity markets. This article analyses the impact of the MiFID II research unbundling provisions on EU sell-side research, following their application on 3 January 2018.

The MiFID II provisions require portfolio managers to pay for the research that they obtain, either by paying themselves or by passing on that charge to their clients. Concerns have been raised that the rules could have had detrimental effects, particularly on SMEs, on the availability and quality of research on EU companies, as well as on company financing conditions. We do not find material evidence of these effects: following the introduction of the MiFID II research unbundling provisions, 1) the quantity of research per SME has not declined relative to larger firms; 2) the probability of an SME completely losing coverage has not increased relative to a larger firm; 3) the quality of SME research has not worsened relative to larger firms; and 4) SME liquidity conditions have worsened, relative to larger firms, in terms of tightness (measured by bid-ask spreads), but not in terms of depth (measured by the Amihud illiquidity ratio and the turnover ratio). However, in absolute terms, SMEs continue to be characterised by lower amount of analyst research, higher probability of losing coverage, worse quality of research and limited market liquidity. This situation appears to have been neither improved nor worsened by the MiFID II research unbundling provisions.

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