Research Unbundling and COVID-19: Will Europe’s Capital Markets Recovery Package Help?

Abstract

In 2018, the European financial regulation MiFID II introduced research unbundling rules that banned the bundling of research payments with execution costs. The aim of research unbundling is to increase transparency for investors and to avoid agency conflicts. Opponents argue that research unbundling reduces small and medium-sized enterprise (SME) research and, thereby, SMEs’ financing opportunities because this research can no longer be cross-subsidized by research fees paid for larger companies. The outbreak of COVID-19 and its impact on financial markets fueled intense discussions on rebundling for SMEs. Consequently, in February 2021, the European Commission adopted a Capital Markets Recovery Package that allows bundled research for SMEs below a market capitalization of EUR 1 billion. Against this backdrop, the authors conducted a survey among European market participants to investigate changes in research services due to research unbundling and the COVID-19 pandemic. Moreover, they examine market participants’ views on the expected effects and improvements of the option to rebundle SME research as provided by the recovery package.

Key Findings

• ▪ MiFID II’s research unbundling led to a drop in research coverage, but did not affect firms’ access to equity.

• ▪ The COVID-19 pandemic did not aggravate the impact of research unbundling on research coverage and firms’ access to equity.

• ▪ Market participants are skeptical about the value of the Capital Markets Recovery Package and believe that the option of bundled payments for SMEs will not be used.