Abstract
Purpose: The literature on demutualization is confined to efficiency and social welfare issues. Little empirical literature exists on the effect of demutualization on listed firms. This study examines the impact of demutualization on the liquidity of listed firms’ stocks.
 Methodology: It empirically investigates how the liquidity of listed firms’ stocks is affected by demutualization. Analyzing data of 137 non-financial firms listed on the Pakistan Stock Exchange for 2005 to 2017, we employ fixed effect regression to test the hypotheses.
 Findings: We find that demutualization has significantly improved liquidity. We analyze all three dimensions of liquidity that are the trading activity, market impact, and transaction cost. We find that demutualization increases trading activity, improve market depth, and has reduced the transaction cost. 
 Implications: Our findings suggest that demutualization is beneficial not only for listed firms but also for its shareholders as all three dimensions of liquidity are improved by demutualization. Stock exchanges that are not demutualized and are facing liquidity problem, can be improved by changing its structure from mutual to demutualized.
 Originality: Prior literature focuses on the impact of demutualization on the stock market or social welfare. There is scares research on the effect of demutualization of the listed firm. This study fills this gap by analyzing the impact of demutualization on listed firms' liquidity in a developing economy, such as Pakistan.
Highlights
Stock exchanges traditionally operated as non-profit or membership organizations
We investigate the impact of demutualization on the liquidity of listed firms’ stocks
We find that demutualization has increased trading activity as the market has become broader after demutualization
Summary
Stock exchanges traditionally operated as non-profit or membership organizations. The market makers or members of the exchange controlled the price, range of services, and quality of services produced by the stock exchange. Members had decision-making power, ownership, and trading rights. Ownership is not transferrable but is terminated if a member quit. These exchanges performed monopoly businesses on their local markets. Companies have no option but to list on their local exchange, and investors have the only option to invest their money in their local market. Since 1993 when the first stock exchange of the world, the Stockholm Stock Exchange, was demutualized, the business environment of stock exchange has been dramatically changed
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