Competition in Exchanges and Reputational Concerns
59 Pages Posted: 22 Jun 2021
Date Written: August 17, 2017
This paper proposes a theoretical model to analyse the effect of competition on the quality of the certification process offered by stock exchanges. If the stock exchange truthfully certifies the quality of a new issue, then it would list only the good projects, which would alleviate information asymmetries and generate gains from trade. However, it may be more profitable for exchanges be too lax in its listing requirements. The trade-off between short-term profits and reputation effects induces strategic behaviour. The results show that overestimating the quality of a project is an equilibrium despite the presence of reputation costs. Counterintuitively, introducing competition leads to more lax requirements than in the monopolistic case and reduces welfare as long as the reputation of the competitor is higher than that of the monopolistic stock exchange.
Keywords: Stock Exchanges, Certification, Reputation, Competition
JEL Classification: G14, G15
Suggested Citation: Suggested Citation