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.