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ESMA Proposes Issuer-Sponsored Research to Address Post-MiFID II Information Gap
The European Securities and Markets Authority (ESMA) is proposing a code of conduct for issuer-sponsored research to address the lack of information on smaller companies following the implementation of MiFID II in 2018, which resulted in a 22% reduction in analysts covering European stocks from 2017-2018.
- What were the immediate consequences of the EU's MiFID II directive on the number of equity analysts covering European stocks and the quality of research produced?
- In 2018, the EU's MiFID II directive unbundled investment research and trade execution, aiming to improve research quality. A subsequent study showed a 22% drop in analysts covering European stocks from 2017-2018, with improved quality in the remaining research, although this improvement was concentrated in larger companies.
- Why did the initial response to the lack of research coverage following the introduction of MiFID II prove inadequate, and what prompted the ESMA to propose a new solution?
- The initial impact of MiFID II was a decline in research coverage, particularly for smaller companies, leading to a lack of information. This prompted the UK to lift the unbundling ban post-Brexit, while the EU eased restrictions for some small caps. However, these measures proved insufficient, leading to the ESMA's proposal for issuer-sponsored research.
- What are the potential long-term implications of ESMA's proposed code of conduct for issuer-sponsored research on the market for investment research, considering both the opportunities and challenges it presents for analysts and issuers?
- ESMA's proposed code of conduct for issuer-sponsored research addresses the ongoing shortage of information on smaller companies by allowing issuers to fund research directly. The requirement for upfront payment and public disclosure aims to mitigate conflicts of interest, potentially creating a new market for research analysts and potentially resolving the information gap. However, fierce competition among analysts could drive down prices, benefiting issuers more than analysts themselves.
Cognitive Concepts
Framing Bias
The narrative prioritizes the negative consequences of MiFID II's unbundling policy, particularly the reduction in research coverage for smaller companies. While the improvements in research quality are mentioned, the emphasis leans towards the problems created by the policy, potentially leading readers to perceive the policy as a net negative. The headline (if one were to be added) would likely focus on this negative aspect as well. The concluding paragraph, focusing on the potential for fierce competition among analysts bidding for issuer-sponsored research, reinforces this negative framing.
Language Bias
The language used is generally neutral and objective, although phrases like "poor quality research" and "a race to the bottom" carry implicit negative connotations. These could be replaced with more neutral terms like "research lacking depth" and "intense competition," respectively.
Bias by Omission
The article focuses heavily on the European experience with MiFID II and its consequences, with limited discussion of other regulatory approaches or the broader global context of investment research. While the UK and Canadian examples are mentioned, a more comprehensive analysis of international regulatory responses would enhance the article's completeness. The potential impact of this lack of broader context is a somewhat skewed perspective on the efficacy and implications of MiFID II.
False Dichotomy
The article presents a somewhat simplified view of the solutions to the lack of research on smaller companies. While issuer-sponsored research is presented as a potential solution, other possible avenues, such as improved investor relations or alternative research models, are not thoroughly explored. The framing limits reader understanding of the complexity of the issue.
Sustainable Development Goals
The article discusses policies aimed at improving the quality of financial research and creating new employment opportunities for analysts. The creation of issuer-sponsored research, even if potentially leading to price competition, still generates work for analysts and contributes to economic activity. While the impact on individual analyst compensation is uncertain, the overall effect on employment and economic growth is potentially positive.