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Changing organizational form in the stock exchange industry and risk-taking

Author

Listed:
  • Isaac Otchere

    () (Carleton University)

  • Sana Mohsni

    () (Carleton University)

Abstract

Abstract Recent developments in the stock exchange industry have compelled some exchanges to demutualize and become for-profit entities. We examine the risk-taking behavior of demutualized exchanges and find that prior to the conversion, the exchanges exhibited higher risk than their mutual counterparts. Following demutualization, however, the exchanges experienced a significant decrease in risk, which is not attributable to industry-wide effects. Our results are consistent with the conjecture that higher risk induced the conversion to equity ownership. Interestingly, we find that publicly listed exchanges that have gone through the three organizational structures exhibit risk-taking behavior somewhat similar to that of the mutual, demutualized, and publicly listed exchanges. We also document significant increases in nontraditional income after demutualization and this increase in nontraditional income is significantly related to the reduction in risk. We therefore attribute the risk reduction experienced by the converted exchanges to diversification.

Suggested Citation

  • Isaac Otchere & Sana Mohsni, 2016. "Changing organizational form in the stock exchange industry and risk-taking," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(4), pages 427-451, November.
  • Handle: RePEc:kap:fmktpm:v:30:y:2016:i:4:d:10.1007_s11408-016-0276-6
    DOI: 10.1007/s11408-016-0276-6
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    References listed on IDEAS

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    1. Bessembinder, Hendrik & Kaufman, Herbert M., 1997. "A Comparison of Trade Execution Costs for NYSE and NASDAQ-Listed Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 287-310, September.
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    6. Erin Oldford & Isaac Otchere, 2011. "Can Commercialization Improve the Performance of Stock Exchanges Even without Corporatization?," The Financial Review, Eastern Finance Association, vol. 46(1), pages 67-87, February.
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    8. Hart, Oliver & Moore, John, 1996. "The Governance of Exchanges: Members' Cooperatives versus Outside Ownership," Oxford Review of Economic Policy, Oxford University Press, vol. 12(4), pages 53-69, Winter.
    9. Otchere, Isaac & Abou-Zied, Khaled, 2008. "Stock exchange demutualization, self-listing and performance: The case of the Australian Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 512-525, April.
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    12. Reena Aggarwal & Sandeep Dahiya, 2006. "Demutualization and Public Offerings of Financial Exchanges," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(3), pages 96-106.
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    More about this item

    Keywords

    Stock exchanges; Demutualization; Self-listing; Risk-taking; Nontraditional income;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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