Changing organizational form in the stock exchange industry and risk-taking
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Recent developments in the stock exchange industry have compelled some exchanges to demutualize and become for-profit entities. We examine the risk-taking behavior of demutualized exchanges and find that prior to the conversion, the exchanges exhibited higher risk than their mutual counterparts. Following demutualization, however, the exchanges experienced a significant decrease in risk, which is not attributable to industry-wide effects. Our results are consistent with the conjecture that higher risk induced the conversion to equity ownership. Interestingly, we find that publicly listed exchanges that have gone through the three organizational structures exhibit risk-taking behavior somewhat similar to that of the mutual, demutualized, and publicly listed exchanges. We also document significant increases in nontraditional income after demutualization and this increase in nontraditional income is significantly related to the reduction in risk. We therefore attribute the risk reduction experienced by the converted exchanges to diversification.
KeywordsStock exchanges Demutualization Self-listing Risk-taking Nontraditional income
JEL ClassificationG10 G15
We thank an anonymous referee and the editor for their insightful comments. The paper also benefited from comments and suggestions from the discussants and participants at the 2015 International Banking and Finance Society Conference (Hangzhou), the 2015 Global Finance Conference (Hangzhou), and the 2016 SGF Conference of the Swiss Society for Financial Market Research (Zurich).
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