Regulation Takes a Back Seat to Business Concerns: Evidence from Stock Exchange Demutualization

Abstract

Increasing globalization and rapid technological development in recent decades have caused many exchanges to change their operating structure, from mutually owned (broker/dealer-owned) to demutualized (for-profit, shareholder-owned). We examine the association between demutualization and changes in listed firms’ reporting quality. Prior research suggests that exchanges’ increased for-profit focus may cause weaker regulation and oversight of listed firms, and higher liquidity may allow listed firms to decrease transparency. Alternatively, demutualization may lead to tightening regulations to assure high-quality listings. We examine reporting quality changes of firms listed on de facto demutualized exchanges (i.e., exchanges that went public and became owned by multiple shareholders following demutualization). Our analyses show that reporting quality of listed firms declines post-demutualization. Additional tests suggest that these changes in reporting quality are attributable to changes in regulation and oversight. Overall, our findings speak to the firm-level reporting consequences of changes in exchanges’ operating structure.

Keywords: stock exchanges; exchange oversight; exchange regulation; demutualization; reporting quality