Changing Organizational Form in the Stock Exchange Industry and Risk Taking

Financial Markets and Portfolio Management (2016) 30:427-451

38 Pages Posted: 2 Feb 2015 Last revised: 5 May 2017

See all articles by Isaac K. Otchere

Isaac K. Otchere

Carleton University - Sprott School of Business

Sana Mohsni

Carleton University - Sprott School of Business

Date Written: July 15, 2016

Abstract

Recent developments in the stock industry including technological development and the emergence of electronic communication networks have forced some exchanges to change their organizational structure by demutualizing and becoming for-profit entities. We examine the risk-taking behavior of demutualized exchanges and find that prior to the conversion the demutualized exchanges exhibited higher risk than their mutual counterparts. Following demutualization however, the exchanges experienced a significant decrease in risk and the observed reduction in risk is not attributed to industry-wide effects. Our results are consistent with the conjecture that higher risk induced the conversion to equity ownership. Interestingly, we find that a sub-sample of publicly listed exchanges that have gone through the three phases (mutual, demutualized and publicly traded) exhibit risk taking behavior somewhat similar to that of our full sample of mutual, demutualized and publicly traded exchanges. We also document evidence of significant increases in non-traditional income for the converted exchanges after demutualization and the increase in non-traditional income is significantly related to the reduction in risk. We therefore attribute the reduction in risk experienced by the converted exchanges to diversification.

Keywords: Stock markets, demutualization, self-listing, risk taking, non-traditional income

JEL Classification: G10, G15

Suggested Citation

Otchere, Isaac K. and Mohsni, Sana, Changing Organizational Form in the Stock Exchange Industry and Risk Taking (July 15, 2016). Financial Markets and Portfolio Management (2016) 30:427-451, Available at SSRN: https://ssrn.com/abstract=2558600 or http://dx.doi.org/10.2139/ssrn.2558600

Isaac K. Otchere (Contact Author)

Carleton University - Sprott School of Business ( email )

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Ottawa, Ontario K1S SB6
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(613) 520-4427 (Fax)

Sana Mohsni

Carleton University - Sprott School of Business ( email )

1125 Colonel By Drive
810 Dunton Tower
Ottawa, Ontario K1S SB6
Canada

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