Three Essays on Stock Exchange Demutualization and Mergers

Abstract

The increased competition in the stock exchange industry, intensified by globalization and technological advancements, has motivated a number of changes in the stock exchange industry including demutualization and mergers. This thesis studies stock exchange demutualization and mergers in three separate but related essays. Essay one 1 investigates the stock market and product market effects of stock exchange mergers, which have been facilitated by demutualization. We find that shareholders of targets and shareholders of the combined exchanges realize significant positive abnormal returns. Additionally, we find that shareholders of competitors from countries in the same geographical region and competitors at the same stage of development also realize significant abnormal returns. We also find that on the product market, the merging exchanges increase their market share and experience reductions in bid-ask spreads while rivals experience decreased market share and increased bid-ask spreads. We contend that stock exchange mergers have resulted in significant wealth creation on the stock market and substantial value creation on the product market for the merging entities. Essay two examines the market quality implications of stock exchange demutualization. We find that exchanges undertaking demutualization (especially developed stock exchanges) achieve significant reductions in transaction costs and volatility. Although the demutualized exchanges see improvements in market quality, a controlled group of mutual rival stock exchanges have experienced increases in spreads and volatility in the post-demutualization period, and have, as a result, seen deterioration in market quality. Essay three explores the market power consequences of stock exchange mergers. We find that stock exchange mergers have not resulted in the exercise of market power. Instead, the mergers have led to efficiency gains for the merging exchanges and efficiency losses for rivals. Our findings are insensitive to several robustness checks.