Abstract

This paper studies the impact on sell-side analysts and the stock market of separating research payments from dealing commissions. We exploit an exogenous shock to sell-side analysts’ research income in Sweden, caused by several of Sweden’s largest asset managers’ adoption of the unbundling model (the RPA model) to pay for the equity research purchased from the sell-side. Using a hand-collected dataset revealing analyst location, we find that the introduction of the RPA model coincides with a reduction in the supply of sell-side research services. The RPA model is associated with a reduction in analysts’ coverage lists, with some firms losing analyst coverage entirely. This reduction is greater for firms with lower institutional ownership and with lower market value of equity. Moreover, we find that, after controlling for changes in analyst coverage, the adoption of the RPA model is associated with an overall improvement in analysts’ research quality, as evidenced by superior earnings forecast ability in the post adoption period. Lastly, we find that the market reacts more strongly to forecast revisions in the post RPA adoption, and the increase in market reaction is mainly attributable to firms with higher institutional ownership and with higher market value of equity. Overall, our results suggest that RPA is associated with an improvement in the information environment for firms with analyst coverage, but some firms suffer a loss of analyst coverage.