Has stock exchange demutualization improved market quality? International evidence
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Has stock exchange demutualization improved market quality? International evidence Kobana Abukari1 · Isaac Otchere2
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract We investigate the market quality effects of stock exchange demutualization and find that demutualized exchanges have achieved significant improvements in market quality following their conversion from mutual to for-profit structure. Demutualized exchanges have realized significant reductions in transaction costs in the post-demutualization period. The benefits are unevenly distributed, with those in developed countries realizing most of the benefits of demutualization. We explore the potential sources of the reductions in spreads on demutualized exchanges and find that, consistent with the predictions of the laws of demand and supply, the increased order flow, market share, and increased listings following demutualization, contribute to the falling spreads. Interestingly, we also find that demutualized exchanges that subsequently go public after demutualization experience incremental improvements in market quality. Our results are robust to different measures of market quality, different model specifications and placebo event date. Keywords Stock exchange · Demutualization · Market quality · Bid-ask spread JEL Classification G15 · G34
1 Introduction The current business environment in which stock exchanges operate is characterized by unprecedented levels of competition. Technological advancements and globalization have contributed to the heightened competition in the industry. The increased competition emanates from within (i.e., among exchanges themselves) and from electronic communications networks (ECNs), as well as dark pools. In response to these competitive threats, the major stock exchanges have resorted to demutualization, among others, as a strategy for coping * Isaac Otchere [email protected] Kobana Abukari [email protected] 1
Laurentian University, Sudbury, ON, Canada
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Sprott School of Business, Carleton University, 1125 Colonel By Drive, Ottawa, ON K1S 5B6, Canada
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with the increased competition. Since 1993 when the Stockholm stock exchange became the first financial exchange to convert from not-for-profit to for-profit entity, demutualization among stock exchanges has become widespread. Data from the World Federation of Exchanges (WFE) shows that the percentage of WFE members that are mutual has reduced dramatically from 40% in 1999 to only 15% in 2013. During the same period, the number of demutualized stock exchanges has increased from 10% in 1999 to 62% in 2013 (WFE 2013). The prevalence of stock exchange demutualization is largely based on the anticipated benefits that the conversion brings to stock exchanges. These benefits include the capacity to tap into new sources of financing for expansion and technology investment, the ability to pursue business opportunities without being constrained by members’ selfinterest and to control co
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