Changing Organizational Form in the Stock Exchange Industry and Risk Taking

Abstract

Recent developments in the stock industry including technological development and the emergence of electronic communication networks have forced some exchanges to change their organizational structure by demutualizing and becoming for-profit entities. We examine the risk-taking behavior of demutualized exchanges and find that prior to the conversion the demutualized exchanges exhibited higher risk than their mutual counterparts. Following demutualization however, the exchanges experienced a significant decrease in risk and the observed reduction in risk is not attributed to industry-wide effects. Our results are consistent with the conjecture that higher risk induced the conversion to equity ownership. Interestingly, we find that a sub-sample of publicly listed exchanges that have gone through the three phases (mutual, demutualized and publicly traded) exhibit risk taking behavior somewhat similar to that of our full sample of mutual, demutualized and publicly traded exchanges. We also document evidence of significant increases in non-traditional income for the converted exchanges after demutualization and the increase in non-traditional income is significantly related to the reduction in risk. We therefore attribute the reduction in risk experienced by the converted exchanges to diversification.