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The effect of the European Markets in Financial Instruments Directive on affiliated analysts’ earnings forecast optimism

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  • Prokop, Jörg
  • Kammann, Benno

Abstract

We investigate the effects of the European Markets in Financial Instruments Directive (MiFID) on optimism in financial analysts’ earnings forecasts for Euro Area firms. We find that before MiFID came into force affiliated analysts – that is, analysts with closer business ties to the firms they follow – issued more optimistic longer-term earnings forecasts than their more independent peers. At the same time their short-run forecasts were significantly less optimistic which is consistent with the notion of downward management of their earnings forecasts to avoid negative earnings surprises. Since the adoption of MiFID, these differences in short-term and longer-term forecasts by affiliated and non-affiliated analysts have been eliminated indicating that with respect to affiliated financial analysts’ earnings estimates MiFID has been successful in mitigating conflicts of interest.

Suggested Citation

  • Prokop, Jörg & Kammann, Benno, 2018. "The effect of the European Markets in Financial Instruments Directive on affiliated analysts’ earnings forecast optimism," Journal of Economics and Business, Elsevier, vol. 95(C), pages 75-86.
    • Handle: RePEc:eee:jebusi:v:95:y:2018:i:c:p:75-86
    DOI: 10.1016/j.jeconbus.2017.06.004
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    More about this item

    Keywords

    Conflicts of interest; Equity; Optimism; Regulation; Security analyst;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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