As part of work led by the MiFIDVision platform (cf. Financial Newsletter No. 34), AMAFI carried out a study on the coverage of French stocks by investment research firms between end-2005 and end-2017 (AMAFI / 18-52).

Unsurprisingly, the findings point to a high correlation between market capitalisation and the number of analysts covering the firm. On average, firms with a market capitalisation of between €10 million and €150 million are covered by fewer than one analyst, while almost ten analysts cover firms with capitalisation of between €1 billion and €5 billion. Overall, coverage of firms with a capitalisation of less than €1 billion decreased between 2005 and 2017, with the average coverage rate for stocks with a market capitalisation of between €150 million and €1 billion falling from five to 3.5 analysts. Only the €10 million-€150 million cap category bucked the trend, as the arrival of new investment research firms in France over the 2007 – 2012 period offset the loss of long-standing providers, paving the way for increased coverage.

The study also highlighted the fact that research on small, medium and mid caps is essentially performed by local firms and highly concentrated. Another key finding was that changes in coverage for a given population of stocks is linked much more closely to “plastic” factors, such as the closure or creation of investment research firms, than to the number of stocks followed by firms, especially in the case of small caps. These findings are cause for concern in the MiFID 2 environment, illustrating the weak foundations underpinning coverage at a time when new research firms cannot always be guaranteed to emerge to compensate for the closure of existing providers. The withdrawal of a big player would increase attrition risk still further. At the end of the day, what is at stake is the market’s ability to provide small, medium and mid-market firms with financing at reasonable cost.