Investment Behavior of Stock Exchanges and the Rationale for Demutualization - Theory and Empirical Evidence

This paper deals with two, potentially intertwined issues of stock exchangegovernance. First, we demonstrate in a static global games model that in-vestment propensity will vary across di®erent types of organizational formsand competition scenarios. Exchanges organized as mutuals are particularlyill-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 asderivatives trading, post-trading and software development services. Second,we explain in a dynamic overlapping-generations framework the rationale forthe recent wave of demutualization, which describes the process of convertinga mutual, not-for-pro¯t stock exchange into an outsider-owned, commercial¯rm. Our model shows that a mutual exchange, facing competition from afor-pro¯t, outsider-owned platform, can only survive by adopting a similargovernance structure.[...]