Causes and Effects of Worldwide Demutualization of Financial Exchanges
41 Pages Posted: 16 Jul 2021 Last revised: 14 Feb 2022
Date Written: February 9, 2022
We examine how the forces of automation, competition, and demutualization are rapidly changing the industrial organization, ownership, and capital structure of the financial exchange industry. We propose the conditions under which demutualization becomes optimal from the perspective of mutually owned exchange owners. We then proceed to build an empirical dataset characterizing the evolution of the leading stock and derivative exchanges around the World along these dimensions. We empirically find that technology driven growth opportunities, product driven growth opportunities and increases in market concentration are the main stimulants for demutualization. These factors remain strongly significant in explaining demutualization after controlling for market capitalization, trading volume and economic freedom environment within the country where the exchange is domiciled. Finally, we analyze the impact of demutualization from the perspectives of other stakeholders in financial markets. Turnover and liquidity for investors improve after demutualization, helping reduce the cost of capital for corporations.
Keywords: Demutualization, Exchanges, Panel data model, Survival analysis
JEL Classification: G32, G34, C23
Suggested Citation: Suggested Citation