The Markets in Financial Instruments Directive and Sensitivity of Investors’ Portfolio Allocation to Analyst Recommendations

The update of the Markets in Financial Instruments Directive (henceforth MiFID II) regulation unbundles research cost from the commission fees since January 2018 in Europe. Using a unique data set, we answer three important policy questions: First, has the information content of the analyst research improved after MiFID II? Second, if recommendations are more informative, did MiFID II change the effects of analyst recommendations on investors’ portfolio decisions? Third, did banks use the potentially stronger responsiveness of investors to recommendations after MiFID II to steer their customers tighter to stocks they sell? Our key findings are that after the implementation of MiFID II, 1) the information context in particular with respect to the earnings per share predictions of analysts became more precise, 2) while the propensity to buy stocks did on average not change for households as a whole, we find that customers will buy more of a stock if their affiliated bank issued a buy recommendation on a stock and 3) banks can more strongly steer their affiliated customers to buy into stocks the bank intends to sell.