Information externality of paid-for-analysts

Abstract

The implementation of the Markets in Financial Instruments Directive II (MiFID II) in 2018 has increased demand for paid analysts' research service in Europe. In this research, using a hand-collected dataset of the paid analysts' research service in Europe and employing a difference-in-differences research design, I find that financial analysts tend to make more accurate earnings forecasts for non-paying firms in the same industry of their paying firms than non-paying firms in the different industry after they are appointed as paid-for-analysts by the paying firms for their service. I also find that relative to non-paying firms with a better information environment, non-paying firms with weaker information environments tend to exhibit a greater level of improvement in analyst earnings forecast accuracy after the appointment of the analysts for their research services. Similarly, I also find that paid-for­analysts tend to cover more non-paying firms in the same industry of their paying firms after their appointment of paid-for-analysts. Overall, the findings of this study are consistent with the conjecture that paid-for-analysts' greater level of access to paying firms' private information facilitates their earnings forecasts of non-paying firms.