Abstract
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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
In analyzing the risk-taking behavior of stock exchanges, it is important to control for industry-specific factors that can affect the risk of the demutualized exchanges. This requires constructing a control sample that has not demutualized. Ideally, using industry counterparts from the same country would have been preferred, but the nature of the test group presents a matching challenge. Most countries have one stock exchange and, therefore, matching on the basis of industry, size, and volume of transactions using exchanges from the same country is not feasible. To control for stock-exchange-industry-specific effects on risk-taking, we created a portfolio of mutual exchanges as a matching sample for the demutualized exchanges. We recognize that these exchanges may not be good matches for the demutualized exchanges, of which the majority comes from the developed world, because the mutual exchanges are different in terms of size and level of development and their risk measure may indeed reflect country-specific factors. Nonetheless, as imperfect as they may be, creating a portfolio helps minimize the country-specific effects. More importantly, it helps capture some of the industry-wide effects that can affect risk-taking in the stock exchange industry.
We were unable to obtain information on data income, another traditional source of income. However, since this source constitutes a small proportion of the exchanges’ income, we do not anticipate this data limitation issue to have a significant impact on our results.
References
Aggarwal, R.: Demutualization and corporate governance of stock exchanges. J. Appl. Corp. Financ. 15, 105–113 (2002)
Aggarwal, R., Dahiya, S.: Demutualization and public offerings of financial exchanges. J. Appl. Corp. Financ. 18(3), 96–106 (2006)
Azzam, I.: Stock exchange demutualization and performance. Glob. Financ. J. 20, 211–222 (2010)
Bessembinder, H., Kaufman, H.: A comparison of trade execution cost for NYSE and NASDAQ-listed stocks. J. Financ. Quant. Anal. 32(3), 287–310 (1997)
Di Noia, C.: The stock-exchange industry: network effects, implicit mergers and corporate governance. Quaderni de Finanza. 33 (1999)
Domowitz, I., Steil, B.: Automation, Trading Costs, and the Structure of the Securities Trading Industry. Brookings-Wharton Papers on Financial Services, 33–81 (1999)
Elliott, W., Warr, R.: Price pressure on the NYSE and Nasdaq: evidence from S&P 500 index changes. Financ. Manag. 32(3), 85–99 (2003)
Hart, O., Moore, J.: The governance of exchanges: members’ co-operatives versus outside ownership. Oxf. Rev. Econ. Policy 12, 53–69 (1996)
Krishnamurti, C., Sequiera, J.M., Fangjian, F.: Stock exchange governance and market liquidity. J. Bank. Financ. 27(9), 1859–1878 (2003)
Lee, R.: The Future of Securities Exchanges. Brookings-Wharton Papers on Financial Services, 1–33 (2002)
Macey, J.R., O’Hara, M.: The economics of stock exchange listing fees and listing requirements. J. Financ. Intermed. 11, 297–319 (2002)
Mercieca, S., Schaeck, K., Wolfe, S.: Small European banks: benefits from diversification? J. Bank. Financ. 31(7), 1975–1998 (2007)
Mendiola, A.M., O’Hara, M.: Taking Stock of Stock Markets: The Changing Governance of Exchanges. Working Paper, Cornell University (2003)
Oldford, E., Otchere, I.: Can commercialization improve the performance of stock exchanges even without corporatization? Financ. Rev. 46, 67–87 (2011)
Otchere, I.: Stock exchange self-listing and value effects. J. Corp. Financ. 12, 926–953 (2006)
Otchere, I., Abou-Zied, K.: Stock exchange demutualization, self-listing and performance: the case of the Australian Stock Exchange. J. Bank. Financ. 32, 512–525 (2008)
Otchere, I., Owusu-Antwi, G., Mohsni, S.: Why are stock exchange IPOs so underpriced yet outperform in the long run? J. Int. Financ. Mark. Inst. Money 27, 76–98 (2014)
Pagano, M., Röell, A., Zechner, J.: The geography of equity listing: why do companies list abroad? J. Financ. 57, 2651–2694 (2002)
Parker, D., Hartley, K.: Organizational status and performance: effects of employment. Appl. Econ. 23(2), 403–416 (1991)
Petersen, M.: Estimating standard errors in finance panel data sets: comparing approaches. Rev. Financ. Stud. 22, 435–480 (2009)
Riordan, R., Storkenmaier, A.: Latency, liquidity and price discovery. J. Financ. Markets 416–437 (2012)
Schmiedel, H.: Technological development and concentration of stock exchanges in Europe. Bank of Finland Discussion Paper Series 21/2001 (2001)
Serisfoy, B.: Demutualization, outsider ownership, and stock exchange performance: empirical evidence. Working Paper Series: Finance and Accounting, Goethe University, Frankfurt am Main (2007)
WFE: Annual Report (2007)
Acknowledgments
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).
Author information
Authors and Affiliations
Corresponding author
Appendix: List of stock exchanges
Appendix: List of stock exchanges
This table contains the list of exchanges contained in the sample of mutual, demutualized, and listed stock exchanges. The first column lists mutual exchanges, which comprise the benchmark portfolio. The second column lists the sample of demutualized exchanges. The third column shows the sample of exchanges that have demutualized and subsequently self-listed.
Mutual exchanges | Demutualized exchanges | Listed exchanges |
|---|---|---|
Amman Stock Exchange | Bolsa de Valores de Lima | Archipelago Holding |
Colombo Stock Exchange | Bourse de Casablanca | Australian Securities Exchange |
Cyprus Stock Exchange | Bovespa Holding SA | BM&F Bovespa |
Gretai Stock Exchange | BSE Bombay Stock Exchange | BME Spanish Exchanges |
Indonesian Stock Exchange | Chicago Stock Exchange | Bolsa de Comercio de Santiago |
Istanbul Stock Exchange | Kazakhstan Stock Exchange | Bolsa de Valores de Colombia |
Karachi SE | Macedonian SE | Bolsa Mexicana de Valores |
Korea Exchange | Malta Stock Exchange | Bucharest Stock Exchange |
Namibian Stock Exchange | MICEX | Bursa Malaysia |
Mongolian Stock Exchange | CBOE Holding (CBOE) | |
Nairobi Stock Exchange | Chicago Board of Trade (CBOT) | |
National Stock Exchange | CME Group | |
Philadelphia Stock Exchange | Deutsche Borse AG | |
Prague SE | Dhaka Stock Exchange | |
RTS Exchange | Euronext | |
SIX Swiss Group | Hellenic Exchanges | |
Stock Exchange of Mauritius | Hong Kong Exchanges & Clearing House | |
Stock Exchange of Thailand | Intercontinental Exchange | |
Taiwan Futures Exchange | International Securities Exchange | |
Tehran SE | Johannesburg Stock Exchange | |
Tokyo Stock Exchange Group | London Stock Exchange | |
Wiener Boerse | NASDAQ OMX Group | |
New Zealand Exchange | ||
NYMEX Holding | ||
NYSE Euronext | ||
OMX Group | ||
Osaka Securities Exchange | ||
Oslo Bors VPS Holding ASA | ||
Philippine Stock Exchange | ||
Singapore Exchange | ||
TMX Group | ||
Warsaw Stock Exchange |
Rights and permissions
About this article
Cite this article
Otchere, I., Mohsni, S. Changing organizational form in the stock exchange industry and risk-taking. Financ Mark Portf Manag 30, 427–451 (2016). https://doi.org/10.1007/s11408-016-0276-6
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11408-016-0276-6