The Effect of Stock Exchange Demutualization on Liquidity and Transparency of Listed Firms

51 Pages Posted: 23 Feb 2020 Last revised: 31 Mar 2020

See all articles by Shawn X. Huang

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Min Kim

Arizona State University (ASU) - W.P. Carey School of Business

Maria Rykaczewski

Arizona State University

Maria Vulcheva

Florida International University

Date Written: March 30, 2020

Abstract

This study investigates the association between changes in the operating structure of stock exchanges in recent decades, from mutually owned (broker/dealer-owned) to demutualized (for-profit, shareholder-owned), and stock liquidity and transparency of listed firms. We focus on de facto demutualized exchanges, i.e., exchanges that went public and became owned by multiple shareholders following demutualization. For these exchanges, we find that liquidity improves post-demutualization, consistent with prior literature in finance. Next, we examine whether these improvements in liquidity are attributable to changes in the quality of listed firms and regulatory oversight, or whether they are more likely due to other causes (e.g., an increase in technological spending by the exchange). Our results indicate that reporting quality of listed firms declines post-demutualization, supporting the second explanation. In supplemental analyses focusing on new listings and trading suspensions, we find that the changes in reporting quality are driven primarily by already listed firms and not by new listings. Overall, our results point to declining reporting quality of listed firms after demutualization, which highlights the concern of market participants, academics, and regulators that the demutualization of stock exchanges may lead to a decline in regulatory oversight of listed firms.

Keywords: Demutualization, exchange regulation, stock exchanges, disclosure quality

Suggested Citation

Huang, Shawn X. and Kim, Min and Rykaczewski, Maria and Vulcheva, Maria, The Effect of Stock Exchange Demutualization on Liquidity and Transparency of Listed Firms (March 30, 2020). Available at SSRN: https://ssrn.com/abstract=3525501 or http://dx.doi.org/10.2139/ssrn.3525501

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Min Kim

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Maria Rykaczewski (Contact Author)

Arizona State University ( email )

Tempe, AZ 85287
United States

Maria Vulcheva

Florida International University ( email )

11200 SW 8 Street RB244B
Miami, FL 33199
United States

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