Demutualization Of Stock Exchanges Research Articles

Thy Governance Matters: A Study on Governance Practices of Stock Exchanges in India

Historically the responsibility of ushering the practices of good governance, transparent management and effective control process for the corporate houses rests under the jurisdiction of those stock exchanges where the shares of the companies are listed. However, the very question of the management and governance of these stock exchange houses are always under the scanner across the globe in view of the limitations of their historic pattern of member-owned ‘non-profit’ kind of mutual organizational structure. The lacunae of that typical organizational structure was that their activities are primarily targeted towards members interests as well as that set up was not immune fully from the malice like insider trading and conflict of interest for office bearers and traders. In view of this following the global pattern the Union Government of India had decided for corporatization of stock exchanges thereby creating a separation of ownership, management and trading membership of stock exchanges which is formally known as demutualization and corporatization of stock exchanges. A committee was set up by the SEBI under the chairmanship of Justice M.H. Kania which had submitted the report in 2002 recommending corporatizations and demutualization of stock exchanges which become mandatory for every stock exchange in India to implement within a stipulated period of time. Against this backdrop the present study is conducted to make an overview of the present state of governance affairs of major stock exchanges in India. It has been observed that the corporatization and governance practices of the major bourses in India had followed governance practices like separation of the post of chairman and CEO, inclusion of public interest directors as outside directors in the board, adherence to code of conducts for directors, organizing frequent meetings of directors etc.

From Mutual Association to Demutualisation: A Paradigm Shift in the Ownership and Governance of Stock Exchanges in India

A group dominated by brokers prepared a platform where they can trade in securities of listed companies. Year after year that group got larger and no. of brokers associated themselves which later became stock exchanges. However, with little capital, rising competition, and almost negligible governance, investor’s wealth and confidence over the stock exchanges decreased. Considering such a situation, the Indian Govt. came up with a series of amendments in 2002-2005 to the existing laws so to inspire a sense of confidence among the investors. These amendments not only made the demutualization of stock exchanges compulsory but also streamlined the process of corporate governance. However, this was not the first time when a govt. has tried regulating Indian stock exchanges. The past record shows that even colonial govt. attempted to regulate the Bombay Stock Exchange and the trading done therein. This paper attempts to do a comprehensive study of the changes in the ownership structure from a not-for-profit member-owned organization to a shareholder-owned organization and the role of governments (including the pre-independence governments) in regulating the stock exchanges in India. The primary contribution this study seeks to make in the sphere of corporate governance related to the process of demutualization of Indian stock exchanges. This shall not only help in improving investor’s perception of the stock exchanges but shall also promote the reliability and confidence of investors.

Demutualized Stock Exchanges: The Effect of Demutualization on Liquidity and Transparency of Listed Firms and Enforcement of Listing Rules

This study investigates the association between changes in the operating structure of stock exchanges in recent decades, from mutually owned (broker/dealer-owned) to demutualized (for-profit, shareholder-owned), and stock liquidity and transparency of listed firms. We focus on de facto demutualized exchanges, i.e., exchanges that went public and became owned by multiple shareholders following demutualization. For these exchanges, we find that liquidity improves post-demutualization, consistent with prior literature in finance. Next, we examine whether these improvements in liquidity are attributable to changes in the quality of listed firms and regulatory oversight, or whether they are more likely due to other causes (e.g., an increase in technological spending by the exchange). Our results indicate that reporting quality of listed firms declines post-demutualization, supporting the second explanation. In supplemental analyses focusing on new listings and trading suspensions, we find that the changes in reporting quality are driven primarily by already listed firms and not by new listings. Overall, our results point to declining reporting quality of listed firms after demutualization, which highlights the concern of market participants, academics, and regulators that the demutualization of stock exchanges may lead to a decline in regulatory oversight of listed firms.

Has stock exchange demutualization improved market quality? International evidence

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.

Board restructuring and successful demutualization: the stock exchanges

PurposeThe purpose of this paper is to study corporate governance restructuring strategies of companies to adapt to new market conditions following conversion into a for-profit structure. It focuses on the changes in the composition of the board of directors.Design/methodology/approachThe paper conducts a field experiment using stock exchanges, which have become more international over time, and many of which have been forced to demutualize and convert to for-profit structures to compete more efficiently. The paper does a fine-grained analysis of restructuring in the composition of the board using the ANOVA technique. The paper also examines the impact of this board composition restructuring on the reputation of the exchanges using a regression technique.FindingsThe authors find that the stock exchanges restructured board composition and refocused them to create better value. Results suggest that the conversion of a company to a for-profit structure brings efficiencies when accompanied by changes in the governing bodies. The authors also find that converting to for-profit firms had a positive impact on the reputation of the exchanges. The positive impact was even greater when accompanied by changes in board composition.Research limitations/implicationsA stronger focus on the corporate governance dimension to understand the successful demutualization of stock exchanges is needed.Originality/valueThe authors analyze the corporate governance dimension during demutualization processes of an under examined sector. The financial performance of the stock exchanges the authors study significantly improved after their conversion to for-profit organizations and provide an example of successful corporate governance restructuring.

The new kid on the block

Since early 1990s, demutualization of stock exchanges has become a global trend. Recently, the Securities and Exchange Commission of Nigeria expressed the intention of Nigeria to join the global trend with the passage of the Securities and Exchange Commission Rules on Demutualization of 2015. This paper examines demutualization policy in Nigeria with particular reference to the issue of conflict of interest. It argues that conflict of interest in the post-demutualization era in Nigeria could be appropriately managed through the co-regulatory approach that is practised under the mutual structure, albeit with some reforms. The paper suggests two major reforms. First, the self-regulatory function of exchanges should be restructured in such a way that the role of exchanges as market operators would be distinct from their role as market regulators. Second, the regulatory role of the Securities and Exchange Commission should be expanded to include the power to appoint members of the board of management of a demutualized exchange; regulation of self-listing of a demutualized exchange; and adjudication of conflicts where the commercial interest of a demutualized exchange conflicts with that of a listed entity on the exchange. The paper further argues that such regulatory system would not only enhance the front-line regulatory responsibility of demutualized exchanges, but also ensure a balanced approach to regulation of conflicts of interest in post-demutualization era in Nigeria’s securities market.

Demutualization of Stock Exchanges: A Corporate Blessing in Disguise for Stock Market Growth

Changes in ownership, governance, and objectives of stock exchanges significantly impact on stock market growth indicators such as number of listed companies, number of transactions in equity market, stock index, and market capitalization.

An Analysis of the Impact of Demutualization on Stock Market Liquidity

This paper analyzes the impact of demutualization on stock market liquidity using annual data available from 24 demutualized and 26 mutual stock exchanges for the period 1990 to 2011. We use a panel data regression model to examine the nature and significance of the relationship between stock exchange demutualization and two measures of stock market liquidity (turnover rate and the value of volume traded relative to Gross Domestic Product (GDP). The findings indicate that demutualized exchanges exhibit significantly greater liquidity compared to mutual exchanges after controlling for age, size, trading technology, and level of economic development. We also observe that, world-wide, the trend has been that automation of trading precedes demutualization, and that the time between automation and demutualization has a positive but statistically insignificant effect on liquidity. The study is a remarkable departure from the traditional focus on the exchange governance effects of demutualization. Furthermore, it contributes to the literature on financial market development by documenting some of the key drivers of stock market liquidity, which in itself is a widely acknowledged driver of economic growth.

Listing and Being Listed Costs: An International Comparison

Competition among exchanges is growing fast on trading services. Differently, competition for listing securities has so far been minimal, if not absent, especially in Europe. The purpose of this paper is to highlight the monopolistic position that many important and well renowned exchanges around the world still maintain on offering and pricing of listing services. We first try to clarify the content of listing services. We then quantify fees applied by different exchanges to companies according to their size. We consider both initial and annual fees. Our results show that US exchanges are more expensive for medium sized firms while EU markets apply higher fees to largest companies. Demutualization of stock exchanges did not lead to the expected reduction of listing fees. Many exchanges, particularly in the EU, are still taking advantage of their exclusive control position by applying premium price policies to largest companies in order to cross subsidize smaller companies.

Demutualization of stock exchanges in Pakistan: Challenges and benefits

Demutualization is a process of segregation of ownership, management and trading membership in an exchange. Studies show that demutualization is a mechanism which minimizes the conflict of interest by reducing the overbearing influence of the members on the affairs and management of the exchange. The Government has initiated demutualization process in Pakistan as part of the capital market reforms program. This paper studies the ongoing process of demutualization in Pakistan and identifies its benefits and challenges. The benefits include better corporate governance, access to economic and human capital, enhancement in listings and international alliances. The study also identifies some challenges which are regulatory framework, conflict of interest, ownership structure issues and agency cost. Key words: Demutualization, conflict of interest, agency cost, corporate governance, integration and alliance.

Stock exchange demutualization and performance

Literature on the demutualization of stock exchanges has focused on social welfare and efficiency issues, whereas there is scarce empirical literature referring to the impact of a demutualization on the exchange financial performance. In addition, little is known about the factors that influence an exchange's decision to demutualize. Utilizing data on 11 out of 20 demutualized stock exchanges during the period 1996–2008, we find that: (1) demutualization increases an exchange's financial performance, size, and liquidity, while lowers its debt; (2) a stock exchange with relatively large size has relatively low profitability and high debt; (3) an exchange with relatively large size, low debt and high value of trade is more likely to demutualize. We conclude that stock exchange conversion from mutual to demutualized exchange is value enhancing for the exchange and its shareholders.

Stock exchange demutualization, self-listing and performance: The case of the Australian Stock Exchange

This paper examines the effects of the recent spate of financial exchange mutual-to-stock conversion phenomenon on the performance of listed exchanges and the quality of the stock market using the Australian Stock Exchange (ASX) as a case study. We find that the ASX stock significantly outperformed the stock index and the control group on a market-adjusted return basis. The stock market performance is driven by strong operating performance. The profitability ratios of the ASX have significantly improved in the five years following the demutualization and self-listing. The performance improvements remain significant even after controlling for growth in the Australian economy. From a market quality perspective, we document evidence of increased trading activity by foreign investors after ASX’s demutualization and self-listing. Interestingly, we also find that bid-ask spreads of the stock market have narrowed in the post-conversion period. In particular, small-cap firms have become more liquid. The results show that stock exchange conversion from mutual to publicly traded exchange is not only value enhancing for the exchange and its shareholders, but it is also beneficial for the stock market as a whole.

Stock Exchange Demutualization and Self Regulation

This article primarily discusses role of self regulation of stock exchanges in a demutualized environment. It has been argued that there are some genuine concerns about conflict of interest between the regulatory role of the stock exchange and its business interest as a corporate entity. Congruent with the business prudence of any corporate entity, it has been argued that argue that the effectiveness of self regulation is limited to the extent to which the exchange can internalize the cost of regulation. The conflict of interest underlying the activities of listing, supervision of market operation and business capacity planning has been exemplified and discussed in this article. Finally an attempt has been made to resolve the problem of conflict of interest in a generic manner.

Démutualisation des Bourses : une condition préalable à une nouvelle capacité d’innovation ?

Stock exchange demutualization : a precondition for their capacity to innovate ? Demutualization is a response of stock exchanges to face increasing competition from globalization and innovation. In theory, with greater competition and incentive to raise efficiency and innovate, demutualized exchanges should be more market focused and produce important innovations. So far, the evidence is not conclusive. Demutualization is a trade-off between profit motivation and the non-profit and public good of market development and regulation. Being important utilities, stock exchanges in smaller markets can easily become monopolies that may focus on profit and neglect their role as regulators. The key to innovation therefore depends on good corporate governance, proper oversight and the internal incentive structure. Some exchanges demonstrate capacity to change through internal restructuring without demutualizing. Hence, the case for demutualization is not definitive. This paper summarizes the various views on demutualization. JEL classification : G2, G28

Stock exchange demutualization: a precondition for their capacity to innovate?

Demutualization is a response of stock exchanges to face increasing competition from globalization and innovation. In theory, with greater competition and incentive to raise efficiency and innovate, demutualized exchanges should be more market focused and produce important innovations. So far, the evidence is not conclusive. Demutualization is a trade-off between profit motivation and the non-profit and public good of market development and regulation. Being important utilities, stock exchanges in smaller markets can easily become monopolies that may focus on profit and neglect their role as regulators. The key to innovation therefore depends on good corporate governance, proper oversight and the internal incentive structure. Some exchanges demonstrate capacity to change through internal restructuring without demutualizing. Hence, the case for demutualization is not definitive. This paper summarizes the various views on demutualization. JEL classification : G2, G28

The Trade Policy Review of Japan

The literature on the impact of the demutualization of stock exchanges on performance is growing since the percentage of demutualized exchanges has risen from 10% in the mid-1990s to 63% in 2002. The Bombay Stock Exchange, established in 1875, demutualised in 2005 to follow the “for profit company†model of the National Stock Exchange incorporated in 1992. The performance of the Bombay Stock Exchange is analysed using data from 1998 until 2016 to cover pre and post demutualization, but a significant relation between demutualisation and performance could not be found. Comparing the Bombay Stock Exchange with performance data from the National Stock Exchange showed the latter having a significantly higher performance implying that the value enhancing effects of demutualisation is yet to be fully achieved.