Research Unbundling and Market Liquidity: Evidence from MiFID II

The second Markets in Financial Instruments Directive (MiFID II) mandated the unbundling of payments for research and trading. This research explores whether the impact of MiFID II differs between large and small firms in terms of analyst coverage and stock liquidity. In particular, we focus on the London Stock Exchange with its more regulated Official List (Main Market) and less regulated Alternative Investment Market (AIM). We find a significant drop in analyst coverage on the Main Market, which leads to a deterioration in market liquidity. In contrast, the requirement of AIM firms to retain a Nominated Adviser (NOMAD), who often provide research coverage, has mitigated the impact of MiFID II. AIM firms have experienced marginally higher research coverage and liquidity, consistent with NOMADs facilitating the dissemination of firmspecific information.