Liquidity Following MiFID II estimating the effect of research unbundling on norwegian small and mid-cap stocks
Abstract
MiFID II was implemented in 2018 and requires that cost of research products is unbundled
commission fees. An anticipated consequence of the” inducement rule” is reduced coverage of
small-and mid-cap stocks. In light of prior literature on the relationship between analyst
coverage and stock liquidity, we investigate whether MiFID II has 1) affected the analyst
coverage of Norwegian small- and mid-cap stocks, and 2) affected the liquidity of Norwegian
small- and mid-cap stocks. Through our empirical analysis, we are not able to estimate a
meaningful impact of MiFID II on the number of analysts, with a marginal, insignificant
reduction of 0.04 per cent. However, we do find that the liquidity of Norwegian small- and
mid-cap stocks has decreased following MiFID II and estimate an increase in the relative Bid-
Ask spread of ~100 bps in the subsequent period.