MiFID II Impacts Research Coverage and Quality

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According to a recent survey conducted by UK-based consulting firm, Citigate Dewe Rogerson, over 52% of the UK investor relations professionals surveyed reported a decline in sell-side analyst coverage while 38% reported a drop in research quality.

11th Annual IR Survey

According to financial communications consulting firm Citigate Dewe Rogerson’s 11th Annual IR survey, 52% of UK companies reported a year-on-year decline in the number of sell-side analysts covering them and 38% reported a fall in the quality of that research.  For European companies excluding the UK, the figures were 39% and 20%, respectively.

As you can see from the above tables, it is interesting to note that the drop in both coverage and quality was most pronounced for large cap companies compared to mid or small cap firms.

Sandra Novakov, Head of Investor Relations at Citigate Dewe Rogerson (CDR), commented on this year’s survey results, “Analysts scrutinise companies, and this helpfully draws attention to them. The more pronounced decline in sell-side research in the UK means that high-quality, medium-sized and smaller companies face a very real risk that they drop off the radar of institutional investors. This can lead to a reduction in liquidity that is hard to recover from.”

The CDR survey also revealed that corporate IROs intend to respond to this decline in coverage and quality by becoming more proactive in their own marketing efforts in order to get their story out to potential investors.

CDR’s survey included participation from 479 IR professionals across the world, including 242 from Europe.

Our Take

While the results of the CDR survey are not terribly surprising to anyone who has closely watched the roll out of MiFID II, they are contrary to the views expressed by the FCA.  In a recent review of MiFID II, the FCA concluded that there was “no evidence of a material reduction in research coverage, including for listed small and medium enterprises (SMEs)”.

The results of the CDR survey should also support the SEC’s ongoing concerns that MiFID II-like research unbundling could adversely impact capital formation, particularly among small cap companies.  Consequently, we continue to doubt that the SEC is likely to try and harmonize US regulations with the EU’s research unbundling rules mandated by MiFID II.

 

 

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About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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