MiFID II requires EU-based asset managers to separate payments for research from execution costs in trading commissions. Under this unbundling rule, asset managers must either charge research costs explicitly to investors or absorb these costs internally. We model the impact of unbundling on asset managers and investors and find that this new regulation provides global asset managers with a “pecuniary incentive” to use non-EU client commissions to subsidize the cost of European research. Consistent with this hypothesis, we find empirical evidence that the unbundling rule for mutual funds operating in Europe is accompanied by an increase in bundled commissions generated by their US counterparts. Specifically, US funds with an EU twin (an EU-based fund with the same management team and investment style) exhibit higher bundled commissions following the unbundling regulation. Correspondingly, EU twins benefit from this cross-subsidization by increasing value-added while maintaining similar management fees and trading activity. Our findings suggest that agency costs are not mitigated but merely shifted from a more regulated to a less regulated market. We conclude that, in global financial markets, only internationally coordinated regulatory actions are effective.

I study a model of activist short-termism, where the activist can sell his stake in the target before the impact of his intervention is realized. Changes in liquidity or policies that make activists' exit harder can increase firm value if there is only moral hazard (where activist's intervention creates more value if he exerts effort) or only adverse selection (where some interventions destroy value while others create value). However, these changes destroy total firm value when both moral hazard and adverse selection are present. Policies that reward long-termism can destroy total firm value, but with a lower likelihood. The reason behind these implications is that when the moral hazard problem is binding, a higher number of value-destroying activists results in a higher probability of effort by the value-creating activists, and as a result of this higher effort, average firm value strictly increases.