The QCA Board Brief: What the changing investment research landscape means for public companies

14 Dec 2018 / News

The Quoted Companies Alliance (QCA) publish a quarterly set of papers for member companies to discuss at board meetings, inviting experts in their fields to provide a written insight. This quarter the QCA asked Hardman & Co to provide an understanding as to what companies can do in response to the changing research environment. Here is what we had to say:

MiFID II came into effect in January 2018 and is the equivalent of an earthquake in capital markets. Public companies have already noticed a resulting reduction in analyst coverage, as commentators had forecast. This trend will accelerate, and we have already witnessed an unhelpful reduction in liquidity as a result.

What is less understood is that the reach of brokers’ research has probably suffered even more as professional investors have cut the number of brokers with which they engage, spending their shrunken research budget more frugally. Share prices will probably become more volatile as a result.

Boards need to keep a wary eye on the issue. The first action should be to understand whether all institutional investors are getting the house broker’s research.

If you are struggling to get analysts to write about you (which is different to them attending analyst meetings!) you should consider commissioning research.

Broadly there are two routes: you could appoint a second ‘house broker’ or a specialist sponsored research house. To make the choice you should focus on two issues:

  • First, how good will the research be? – what is the experience of the analyst, how often will they write, and will there be in-depth reports or just repetitions of the trading statement?
  • Second, where does it go – it’s no good having the world’s best research written if nobody gets to see it! So, insist on a list of the people who read their research and their methods of distribution. For example, is the research just available on the website or do they have a way to specifically target investors. Don’t forget the importance of retail investors who can have a disproportionate impact on share prices – will the research reach them?

Finally, think about the governance around research. Is the fee fixed or is payment in shares? Will they write whatever you tell them or is their editorial freedom protected, which means it will have greater credibility among investors?