Company research quality falls amid tighter European rules
Louisa Clarence-Smith, October 14 2019, The Times
Listed companies have suffered a decline in the quality and quantity of analyst coverage since new European rules were introduced, according to research that contradicts official views.
The regulations, which came in at the start of last year, force brokers to charge asset managers separately for trading and research fees. This has encouraged asset managers to cut their budgets for externally produced equity research.
Smaller listed companies are in danger of dropping off the radar of large institutional investors, it has been claimed, making it harder for them to raise capital and reducing liquidity in their shares.
A review of the impact of the new rules — known as Mifid II — by the Financial Conduct Authority last month found “no evidence of a material reduction in research coverage”.
However, in an annual investor relations survey, 52 per cent of British companies reported a year-on-year decline in the number of analysts covering them, while 38 per cent reported a fall in the quality of “sell-side” analyst research.
The survey by Citigate Dewe Rogerson, a financial communications firm, found that for European companies excluding the UK, 39 per cent reported a decline in the number of analysts covering them, while 20 per cent said that the quality of research had suffered. The impact was felt across small, medium and large listed companies.
Almost 250 investor relations officers, from European companies with market capitalisations ranging from less than $1 billion to more than $10 billion, took part in the survey.
Sandra Novakov, head of investor relations at Citigate Dewe Rogerson, said: “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.”
Steven Fine, chief executive of Peel Hunt, a City stockbroker, said that there would be “unintended consequences” from the regulations, including that “specialists will become generalists” and that “generalists will cover too many stocks and their product knowledge will dilute. Quality will decline, gaps will appear in the market and many smaller companies will de-rate.”
The Citigate survey found evidence that companies were taking the initiative to be more active in their engagement with investors. About half of European small and mid-caps said that they planned to dedicate more time to investor roadshows, capital markets days and broker-hosted conferences over the coming year.
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