Evaluation of the impact of the demutualization process on stock exchange value

Abstract

Since the business climate of stock exchanges is facing many challenges due to many turbulent changes, traditional stock exchanges are no longer able to keep up with these changes as they lack the required financial flexibility to do so. As a result,many have changed their ownership and governance structure by adopting the strategy of "demutualization". In fact, the stock exchange could have three different views; market, firm and broker-dealer. The current study focused mainly on the "firm" view of a stock exchange as it gives the motive to investigate its internal structure by examining the impact of demutualization on its financial performance and internal governance mechanisms. Also, the study examined the impact of the changes in internal governance mechanisms on the exchange’s financial performance. Consequently, several empirical models were constructed and nine hypotheses were developed and tested by applying multivariate regression analysis by utilizing unbalanced panel data set of the stock exchanges that are members of World Federation of Exchanges during the period of 1995-2012. The findings revealed that the demutualization has a significant impact on the financial performance in terms of liquidity, profitability and capital structure “mainly the debt maturity”. In addition, demutualization of the stock exchange has a significant impact on its board composition and director’s pay structure. Furthermore, the findings showed that the change inboard size enhances the financial performance of the stock exchange, whereas board independence has an inverse relationship with financial performance. The study clarified that adopting demutualization is considered as one of the successful strategies in managing liquidity and in adjusting the capital structure through the debt maturities. As a result, demutualization supports an exchange in maintaining its financial flexibility and keeping the credit rating within the acceptable range especially in light of the uncertainty of economic environment and competitive conditions. These actions influence critically an exchange’s profitability position and in turn, improve its financial performance. On another level, demutualization sheds light on the importance of the board of directors as an effective mechanism in supporting the significant financial decisions and enhancing the stock exchange's superior performance.Overall, this study concluded that demutualization enhances the value of a stock exchange.