The effect of the European Markets in Financial Instruments Directive on affiliated analysts' earnings forecast optimism

We investigate the effects of the European Markets in Financial Instruments Directive (MiFID) on optimism in financial analysts' earnings forecasts for Euro Area firms. We find that before MiFID came into force affiliated analysts - that is, analysts with closer business ties to the firms they follow - issued more optimistic longer-term earnings forecasts than their more independent peers. At the same time their short-run forecasts were significantly less optimistic which is consistent with the notion of downward management of their earnings forecasts to avoid negative earnings surprises. Since the adoption of MiFID, these differences in short-term and longer-term forecasts by affiliated and non-affiliated analysts have been eliminated indicating that with respect to affiliated financial analysts' earnings estimates MiFID has been successful in mitigating conflicts of interest.