EFA 2007 Ljubljana Meetings Paper
53 Pages Posted: 26 Feb 2007
Date Written: 2007
This paper deals with two, potentially intertwined issues of stock exchange governance. First, we demonstrate in a static global games model that investment propensity will vary across different types of organizational forms and competition scenarios. Exchanges organized as mutuals are particularly ill-suited compared to trading venues owned by outside investors, when investments result in potential rents for only few of their members. These circumstances are likely when exchanges invest in related business activities such as derivatives trading, post-trading and software development services. Second, we explain in a dynamic overlapping-generations framework the rationale for the recent wave of demutualization, which describes the process of converting a mutual, not-for-profit stock exchange into an outsider-owned, commercial firm. Our model shows that a mutual exchange, facing competition from a for-profit, outsider-owned platform, can only survive by adopting a similar governance structure. Our paper will also provide empirical evidence for the two main predictions derived from the models. For that purpose, we employ bivariate probit regressions to simultaneously estimate the propensity to invest and to demutualize, thereby accounting for potential endogeneity issues. We show that competitive pressure indeed increases the likelihood of demutualization and that outsider-owned exchanges have a stronger propensity to invest into related business activities.
Keywords: Stock Exchanges, Demutualization, investment decision, global games
JEL Classification: G15, D07, L02, C33, C35
Suggested Citation: Suggested Citation
Serifsoy, Baris and Tyrell, Marcel, Investment Behavior of Stock Exchanges and the Rationale for Demutualization - Theory and Empirical Evidence (2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=964731 or http://dx.doi.org/10.2139/ssrn.964731