Analyst Incentives, Stock Price Informativeness, and Market Fragility

Abstract

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, although the number of analysts decreases, the average stock price informativeness increases, measured as a decrease in stock return synchronicity with the market. 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. Both results indicate that the market becomes less fragile. 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.