Source: fic.wharton.upenn.edu
Topic: Stock Investment
Sort Desciption: petition between stock exchanges and their investment behavior. ...... However, some investment projects of stock exchanges may have a diverse impact ...
Content Inside: Investment Behavior of Stock Exchanges and the Rationale for Demutualization - Theory and Empirical Evidence Baris Serifsoy Marcel Tyrell ∗ This version: August, 14 th , 2006 †Abstract This paper deals with two, potentially intertwined issues of stock exchange governance. First, we demonstrate in a static global games model that in- vestment 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 invest- ments result in potential rents for only few of their members. These circum- stances 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 in- vest and to demutualize, thereby accounting for potential endogeneity issues. We show that competitive pressure indeed increases the likelihood of demu- tualization and that outsider-owned exchanges have a stronger propensity to invest into related business activities. JEL Classification: G 15, D 7, L 2, C 33, C 35 Keywords: stock exchanges, demutualization, investment decision, overlapping generations, global games, bivariate probit regressions ∗ Address for correspondence: Goethe University Frankfurt; Finance Department; Phone: +49 (0)69 798-25115; Fax: +49 (0)69 798- ...
