Has stock exchange demutualization improved market quality? International evidence

Abstract

We investigate the market quality effects of stock exchange demutualization and find that demutualized exchanges have achieved significant improvements in market quality following their conversion from mutual to for-profit structure. Demutualized exchanges have realized significant reductions in transaction costs in the post-demutualization period. The benefits are unevenly distributed, with those in developed countries realizing most of the benefits of demutualization. We explore the potential sources of the reductions in spreads on demutualized exchanges and find that, consistent with the predictions of the laws of demand and supply, the increased order flow, market share, and increased listings following demutualization, contribute to the falling spreads. Interestingly, we also find that demutualized exchanges that subsequently go public after demutualization experience incremental improvements in market quality. Our results are robust to different measures of market quality, different model specifications and placebo event date.