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Investment Behavior of Stock Exchanges and the Rationale for Demutualization - Theory and Empirical Evidence


Baris Serifsoy


Goethe University Frankfurt - Department of Finance

Marcel Tyrell


Goethe University Frankfurt - Department of Finance; Zeppelin University

2007

EFA 2007 Ljubljana Meetings Paper

Abstract:     
This paper deals with two, potentially intertwined issues of stock exchange governance. First, we demonstrate in a static global games model that investment propensity will vary across different types of organizational forms and competition scenarios. Exchanges organized as mutuals are particularly ill-suited compared to trading venues owned by outside investors, when investments result in potential rents for only few of their members. These circumstances are likely when exchanges invest in related business activities such as derivatives trading, post-trading and software development services. Second, we explain in a dynamic overlapping-generations framework the rationale for the recent wave of demutualization, which describes the process of converting a mutual, not-for-profit stock exchange into an outsider-owned, commercial firm. Our model shows that a mutual exchange, facing competition from a for-profit, outsider-owned platform, can only survive by adopting a similar governance structure. Our paper will also provide empirical evidence for the two main predictions derived from the models. For that purpose, we employ bivariate probit regressions to simultaneously estimate the propensity to invest and to demutualize, thereby accounting for potential endogeneity issues. We show that competitive pressure indeed increases the likelihood of demutualization and that outsider-owned exchanges have a stronger propensity to invest into related business activities.

Number of Pages in PDF File: 53

Keywords: Stock Exchanges, Demutualization, investment decision, global games

JEL Classification: G15, D07, L02, C33, C35

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Date posted: February 26, 2007  

Suggested Citation

Serifsoy, Baris and Tyrell, Marcel, Investment Behavior of Stock Exchanges and the Rationale for Demutualization - Theory and Empirical Evidence (2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: http://ssrn.com/abstract=964731 or http://dx.doi.org/10.2139/ssrn.964731

Contact Information

Baris Serifsoy
Goethe University Frankfurt - Department of Finance ( email )
House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany
Marcel Tyrell (Contact Author)
Goethe University Frankfurt - Department of Finance ( email )
House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany
Zeppelin University ( email )
Am Seemooser Horn 20
Friedrichshafen, Lake Constance 88045
Germany
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