Why do stock exchanges demutualize and go public?
Abstract
In this paper we investigate what drives the decision of stock exchanges to
demutualize and go public. We find that stock exchanges that demutualize
and go public are in countries with a higher level of economic and political
freedom facing greater competition from their peers. Demutualized
exchanges go public to raise capital, and because they are subject to more
trade migration. Comparing the motivation of stock exchanges to go
publicly listed with “common companies”, we find that larger, older and
riskier stock exchanges do not go public, but the primary motive seems to
be to make acquisitions.
JEL classification: G15, G29, G34.
Keywords: stock exchanges, competition, demutualization, going public,
mergers.
1
Following a worldwide trend and after a first failed attempt, the New York Stock Exchange (NYSE)
has demutualized and went public1. In December 2005 more than 955 members of NYSE approved
the proposed merger of the exchange with Archipelago Holdings, a public listed electronic
exchange, and both exchanges become subsidiaries of the NYSE Group Inc. (World Federation of
Exchanges2, 2005).
Traditionally stock exchanges have been mutual structures with access to trading floors restricted to
some intermediaries - members. In addition, regulatory barriers creating regional or national
monopolies protected trading business. The mutual structure assured the protection of monopoly
power and the extraction of monopoly rents as empirically found by Pirrong (1999).
Since the beginning of the 90’s several stock exchanges have demutualized, i.e. they become forprofit companies and opened ownership to outside investors. In addition, a growing number of
exchanges have introduced shares of their companies on the stock market they operate- a process
called self-listing- emphasizing at the same time the for-profit and public nature of the activity. In
the mid 90’s the number of WFE members that were for-profit structures was around 10%, while in
a 2002 survey this number was 63% (WFE, 2003). Table I presents the ten largest stock exchanges
in the world. All exchanges are already demutualized, eight have already went public and the
Spanish exchange already announced that it also intends to go public.
(Table I around here)
Demutualization separates trading and ownership rights diversifying the exchange’s shareholder
base. The traditional owners of stock exchanges, members, lose power and influence in exchange
decisions. It is thus natural that they have resisted to demutualization. Flecker (2005) reports that
the first attempt of NYSE to demutualize in 1999 failed due to the resistance of members.
In this paper we address the question of the stock exchanges demutualization. We want to put the
reasons that make exchanges demutualize and go public on sounder empirical footing. Given that
1
2
The first attempt of NYSE to issue capital was in 1999 (The Wall Street Journal, 29 July 1999).
We will use the acronym WFE hereafter.
2
demutualization process has important consequences on exchange members, we find interesting to
have a better understanding of the motives behind the demutualization and flotation of stock
exchanges. Additionally, little is known whether the stock exchange business share the same
motivation to go public as “common firms”. We intend to fill this gap by analyzing whether
flotation reasons pointed out for firms fit in stock exchanges.
Steil (2002b) points out that a high level of direct competition between exchanges makes it difficult
for members to block reforms and protect their intermediation rights, becoming more open to
governance reforms and outside ownership. In the case of NYSE, despite being the largest stock
exchange in the world it also faced stiff competition. Domestic rivals have demutualized3, some
even went public like NASDAQ, adopting a more entrepreneurial attitude, and ECNs have been
gaining a special status. Since 1997, the Securities Exchange Commission (SEC) has allowed them
to offer information dissemination, price quotation and order matching mechanisms for NASDAQ
securities; regulation on Alternative Trading Systems in 1999 established a regulatory framework to
integrate alternative trading systems more fully into the national market system.
Demutualization is seen as a trigger for the restructuring of stock exchanges. Opening membership
to new investors changes the focus of exchanges. They can feely pursue business opportunities
without being restricted to the vested interests of members. Hart and Moore (1996) show that as the
exchanges faces competition, outside ownership of the exchange becomes more efficient than a
members cooperative. Aggarwal (2002) refers that the decisions to demutualize are based on the
recognition that the old member-owned association structure fails to provide the flexibility and the
financing needed to compete in today’s competitive environment. Mendiola and O’Hara (2004)
argue that the costs of organizing as a cooperative in the new competitive environment are greater
than the benefits.
3
Pacific Exchange in 2004, the Philadelphia Stock Exchange in 2004 and the Chicago Stock Exchange in 2005.
3
We analyze data on the governance regime of 109 stock exchanges. The legal structure of stock
exchanges is classified into five categories defined by the WFE (WFE, 2003): Publicly listed
exchanges; private limited companies; associations; member-owned limited companies and other
legal status such as government and semi-government agencies.
Our main findings are as follow: First, we find that stock exchange competition drives
demutualization and going public. The level of economic freedom and in particular liberalization of
capital market controls are significant variables. We find also that democracy is an important
catalyst of demutualization and going public. This is consistent with Rajan and Zingales’ (2003)
view that in democracy incumbents are less able to protect their monopolies and to impose
restrictions on competition.
Second, two main reasons lead demutualized exchanges to go public: to raise capital and a higher
level of competition from peers. Capital market freedom is higher for publicly listed exchanges than
for private exchanges suggesting that the former are more exposed to trade migration. Further,
demutualized stock exchanges go public to raise new finance similar to the evidence for firms (e.g.,
Boehmer and Ljungqvist, 2002, Kim and Weisbach, 2005).
Third, except for the purpose of raising capital discussed above, stock exchanges seem to go public
from different reasons than the ones that have been theoretically argued and empirically found for
“common” firms. Fixed costs (Ritter, 1987), adverse selection costs (Chemmanur and Fulghieri,
1999) and liquidity costs (Bolton and von Thadden, 1998, Subrahmanyan and Titman, 1999) do not
seem related to the going public decision. We also do not find that stock exchanges go publicly
listed because owners of companies want to diversify risk as suggested by Pagano (1993) and
unlikely Rosen, Smart and Zutter (2005) finding for banking industry. On the contrary, we find that
publicly listed stock exchanges have less volatility. Finally, we do not find evidence that stock
exchanges go public to enhance reputation or because of domestic competition.
4
Fourth, other governance regimes seem to be driven by regional preferences. Associations are likely
to come from South America, while government and members are likely to come from the Middle
East.
Fifth, the data provides evidence that stock exchanges seem to demutualize to make mergers; as
mergers are an important instrument in enhancing liquidity, we interpret this finding as an
additional signal of stock exchange competition.
Finally, the results suggest that stock exchanges go public to make acquisitions, consistent with the
surveys of Brau and Fawcett (2006) and empirical findings of Rosen, Smart and Zutter (2005) on
the banking industry. Further, we find weak evidence for the hypothesis that stock exchanges
restructure internally before going public as posit by Subrahmanyan and Titman (1999).
Our paper is also related to a burgeoning literature that investigates the effects of demutualization.
Domowitz and Steil (1999) relate the quality of markets with governance and automation. Aggarwal
(2002) analyses the performance of stock exchanges in terms of price. Krishnamurti, Sequeira and
Fangjian (2003) compare two stock exchanges from India, and find that the demutualized stock
exchange has better market quality. Mendiola and O’Hara (2004) investigate the effects of the
change of governance in stock exchanges on performance and evaluation. They find that exchange
performance tends to improve after the change of governance. Stock exchanges outperform other
newly listed stocks in their home markets. Hazarika (2005) analyzes two demutualized stock
exchanges, the London Stock Exchange and the Italian Stock Exchange, and finds that
demutualization helps the stock exchanges to increase order flow.
This paper proceeds as follows: Section I describes prior research and the theoretical guidance for
the analysis. Section II describes the data and presents summary statistics. Section III reports the
methodology and makes the analysis of the motives of stock exchange demutualization and
flotation. Section IV examines the relationship between demutualization and mergers. Section V
5
analyses if there is a link between going public and change of ownership control. Section VI makes
a robustness analysis. Concluding remarks follow in Section VII.
I. HYPOTHESES DEVELOPMENT
In this section we start by describing previous research about stock exchange governance, and then
we discuss and enumerate our hypotheses.
A. Mutual structure and competition
Traditionally exchanges have been seen either as public entities, like continental European
exchanges, or as private structures, deeply regulated by public rules like the Anglo-Saxon
exchanges. In all cases the access to trading floors was restricted to some trading intermediariesmembers- that in turn paid membership fees. The trading business was additionally protected by
regulatory barriers that created regional or national monopolies. The mutual structure was therefore
the type of organization that assured the protection of monopoly power and the extraction of
monopoly rents (Pirrong, 1999).
Given the evident advantages of the membership structure, it is interesting to discuss the reasons
that have made members accept demutualization, i.e. a transformation into a for-profit company
with a concomitant separation of trading and ownership rights.
Steil (2002a) relates the change of the governance structure with the progress of technology.
According to the author, the mutual exchange is a product of the pre-techno era, and as markets
become fully electronic “ the traditional concept of membership becomes untenable”. While on a
trading floor there are physical restrictions in the number of traders, the cost of adding a new one in
an electronic trading platform goes marginally to zero.
The implementation of electronic trading systems fosters competition between stock exchanges. As
technology evolves, trade does not depend on a centralized physical venue. Macey and O’Hara
(1999) refer that technology contributed to the demise of national boundaries, and stocks do not
6
need to be listed where the companies operate. A good illustration is when the London Stock
Exchange implemented SEAQ International (SEAQ-I), an electronic market listing some important
European companies already listed on national exchanges without their request4. This move
provoked a reaction of other continental European who reformulated their trading systems and
regulations. Also Electronic Communication Networks (ECNs) brought competition to the
traditional stock exchanges by providing an alternative trading structure without the need for human
broker dealers. They compete with stock exchanges offering lower transaction costs5 and after hour
trading 6. Even trading intermediaries can internally develop their own trading system matching
investors competing with exchanges.
Another sign that the monopoly has disappeared is the decreasing price of membership fees7. In the
NYSE the price of seats has fallen 40% in six years, the OMX has established a single membership
fee for operating on the three exchanges (WFE, 2006) and many stock exchanges have even
eliminated membership fees like Deutche Börse.
The membership structure is considered inadequate in a more competitive environment. Hart and
Moore (1996) show that as the exchanges face competition, outside ownership of the exchange
becomes relatively more efficient than a members cooperative. Aggarwal (2002) refers that the
decisions to demutualize are based on the recognition that the old member-owned association
structure fails to provide the flexibility and the financing needed to compete in today’s competitive
environment. Mendiola and O’Hara (2004) argue that the costs of organizing as a cooperative are
now greater than the benefits.
4
The upshot was an immediate increase of trade towards London, "more than 50 % of the volume of the French
blue chips and one-third of the German ones were diverted to the London market" (Benos and Crouhy, 1996, p.38). See
a detailed description in Pagano (1998).
5
Domowitz and Steil (1999, 2002) find that total trading cost savings achieved through non-intermediated
electronic trading systems were 32.5% on NASDAQ trades, and 28.2% on trades of the NYSE listed stocks. For
commissions, they find that automated execution fees were on average 70% less than those levied by institutional
brokers in the sample. Conrad, Wahal and Jonhson (2003) also confirm that realized execution costs are generally lower
on crossing systems and ECNs.
6
Archipelago starts trade at 4.00 am.
7
The price of an exchange membership, the seat price, incorporates the value of exchange trading privileges to the
marginal member (Pirrong, 1999).
7
Demutualization is seen as a trigger for the restructuring of stock exchanges. Opening membership
to new investors changes the focus of exchanges. They can feely pursue business opportunities
without being restricted to the vested interests of members. Domowitz and Steil (1999) list several
benefits of demutualization8 as compared to mutualized stock exchanges. They advocate that
demutualized stock exchanges should provide a better quality market than mutualized stock
exchanges.
B.
Hypotheses
More recently some authors have emphasized that new political economy can explain how pressure
groups affect regulation and how it can help understanding financial reforms (Pagano and Volpin,
2001). In the same spirit, Rajan and Zingales (2003) propose an “interest group” theory of financial
development where incumbents, already financial established agents, might collectively have a
vested interest in preventing financial development because it breeds competition. Theoretical and
empirical evidence has shown that the long-term interest of exchanges conflicts with member’s
interest. Hart and Moore (1996) analyze the efficiency of an exchange run as a member cooperative
relative to that of a for-profit exchange with a single outside owner. They argue that cooperative
exchange members may be reluctant to accept changes that would affect their own businesses, even
if they are in their own interest in the long run. Pirrong (2000) also demonstrates that when
exchanges are not perfect substitutes, they may adopt inefficient rules that benefit members at the
expense of customers and third parties. The argument is that many stock exchanges are owned or
controlled by financial intermediaries who are also the major buyers of the exchanges services. This
is consistent with empirical observation that members have resisted to changes, such as automation
of trading and remote membership, which would increase stock market liquidity but affect their
profits.
8
See also Lee (2002).
8
Nevertheless, Rajan and Zingales refer there are periods where the incumbents do not always have
the ability or the incentives to oppose development. One of these cases is when there are political
changes like democracy. Perotti and Volpin (2004) argue also that democracy is a proxy of political
accountability and political accountability reduces the influence of lobbying on political decisions.
Building on this insight, we analyze the hypothesis that demutualization (going public) is more
likely to occur in democratic countries.
Another case it is when incumbents face competition. Financial institutions will seek to enhance
their skills to compete with foreign financial institutions both internally and abroad, as in the case of
SEAQ market. Steil (2002b) points out that a high level of direct competition between exchanges
makes it difficult for members to block reforms and protect their intermediation rights, becoming
more open to governance reforms and outside ownership.
Lastly, a final source of pressure comes from foreign financial firms. As they are not part of the
domestic and political network they are not likely to protect local intermediary rights. Steil (2002b)
refers that the internationalization of membership reduces the weight and the influence of domestic
intermediaries. Large international banks, members of numerous exchanges, have much less
motivation to defend mutual structures than local intermediaries. From the above discussion, we
analyze the hypothesis that exchanges that demutualize (go public) are under more intense
competition from their peers.
Stock exchanges are governance standards setters. They demand certain standards of governance to
their listed companies. We conjecture that stock exchanges are influenced by governance
circumstances and consequently stock exchanges in countries with higher standards of governance
are more likely to demutualize (go public).
Our starting point to the analysis of the decision to go public is the standard literature on the topic.
There are several theories that explain why companies go public9. First, the decision to go public
9
For a survey on the topic see Pagano, Panetta and Zingales (1998).
9
has fixed costs. Ritter (1987) advocates that smaller companies are less likely to take this step.
Chemmanur and Fulghieri (1999) highlight that the adverse selection costs are a more serious
obstacle for young and small companies, which have little track record and low visibility than for
old and large companies. Along the same line, we also verify whether stock exchanges share these
motives with “common companies”.
Bolton and von Thadden (1998) model shows that a firm is more likely to choose a dispersed
ownership structure if there is more active trading in its secondary market. Subrahmanyan and
Titman (1999) also refer that when the stock market consists of a relatively small number of firms,
the information conveyed in the public market is less accurate, which generally decreases the
advantage of being publicly financed. Hence, stock exchanges might not want to go public because
of liquidity costs.
Companies can go publicly listed because owners of companies want to diversify risk (Pagano,
1993). Rosen, Smart and Zutter (2005) analyzing banking industry find that banks that go public are
riskier than those that remain private. In the same vein, we check whether riskier exchanges are
more likely to go publicly listed.
Going public might be a question of reputation, as it improves investor and company recognition
(Roëll, 1996). Thus we examine whether it is likely that exchanges with concerns about reputation
go public.
Companies naturally go public to raise capital. Roëll (1996) state that access to new finance is the
most cited reason by stock market entrants for floating their stock. Pagano and Roëll’s (1998)
model shows that companies are more likely to go public if they need a large amount of new
funding relative to their value. The empirical evidence on this hypothesis is mixed. Pagano, Panetta
and Zingales (1998) conclude that Italian firms choose to go public not to finance future investment
and growth but rather to rebalance their leverage and allow managers to liquidate their positions,
while Boehmer and Ljungqvist (2002) and Kim and Weisbach (2005) find that firms rely on IPOs
10
to raise capital to finance investment. We find natural that given that the cooperative structure with
a limited number of members limits investment needs, stock exchange demutualize to raise capital
To summarize, the testable hypotheses are:
H1(Democracy hypothesis): Stock exchanges in more democratic
countries are more likely to demutualize and go public.
H2(Competition hypothesis): Stock exchanges facing more competition
are more likely to demutualize and go public.
H3 (Governance hypothesis): Countries with higher governance
standards have stock exchanges that are more likely to demutualize and
go public.
H4 (Fixed Costs hypothesis): Smaller stock exchanges are less likely to
go public.
H5 (Adverse Selection costs hypothesis): Younger stock exchanges are
less likely to go public.
H6 (Liquidity costs hypothesis): Less liquid stock exchanges are less
likely to go public.
H7 (Risk sharing hypothesis): Riskier stock exchanges are more likely to
go public.
H8 (Reputation hypothesis): Stock exchanges more concerned about
reputation are more likely to go public.
H9 (New Finance hypothesis): Stock exchanges go public to raise
capital.
II. DATA
A.
Variables
The data consists of information about the stock exchange governance regime of 109 stock
exchanges. Data is from Ramos (2006a) that collects detailed information about more than hundred
stock exchanges from sources such as WFE and websites, including the governance regime. Legal
structures of stock exchanges are classified in five categories defined by the WFE (WFE, 2003).
Private limited companies. Stock exchanges that have demutualized but which not are
listed. The ownership is slightly more open and can include for instance institutional investors.
Publicly listed exchanges. The exchange shares are listed on their own exchange and
they are freely negotiable among investors.
11
Associations. These member cooperatives generally have no share capital, and access to
membership is restricted.
Member-owned limited companies. Stock exchanges registered as private companies
where intermediaries are almost the sole owners of the exchange.
Finally, we have other legal status such as government and semi-government agencies.
We will use dummy variables to represent the governance regime.
Some caveats are still in order. Steil (2002a) notes that despite demutualization many exchanges are
still controlled by intermediaries, i.e. stock exchanges became for–profits companies but have no
outside owners. For the author, it is essential that non-members are free to buy equity stakes in the
exchange from current owners, if demutualization is to be successful. Secondly, the natural process
has been first stock exchanges demutualize becoming private firms and then, some have become
publicly listed. Stock exchanges after demutualization are sometimes acquired by other companies,
e.g. the Stockholm Stock Exchange was acquired by OMX, a publicly listed technology company,
or by other stock exchanges, e.g. the Lisbon Stock Exchange was acquired by the Euronext group.
Following discussion of the previous section, we use several measures to proxy competition among
stock exchanges. We would like to have a metric that refers specifically to direct competition
among stock exchanges and internationalization of members as hypothesized by Steil (2002b).
We assume that countries with higher economic freedom allow greater competition between
domestic and foreign intermediaries.
We use the Index of Economic Freedom (ECONOMIC
FREEDOM) of the Fraser Institute, which presents several advantages for our purpose. It covers our
sample almost entirely. It has data available for 1990, capturing the competitive environment at the
beginning of the demutualization trend. Finally, and not least important the index is composed of
several sub-items, some of which are directly related with our ideal metric. The index is on a scale
of 0 to 10, with greater values indicating greater economic freedom (Table 1-Appendix A provides
a detailed description of all variables).
12
Stock exchanges in countries with fewer capital controls are subject to more trade migration.
Therefore we analyze the sub-item International Capital Market Controls10 (CAPITAL
CONTROLS). We expect to see a positive relation between the competition indicators and the
probability of demutualization and going public.
We also analyze whether exchanges that are more subject to regional and domestic competition are
more likely to demutualize and go public. For instance, it is often referred that the launch of a
single currency would foster competition between European exchanges as it increases comparability
between them. To measure the level of regional competition, we use dummy variables to indicate
the geographical region of the stock exchange.
The level of domestic competition measured by the number of stock exchanges in the country might
influence the decision of demutualization and going public. To control this we use dummy variables
to indicate whether the country has one stock exchange (ONESE) - or more than two financial
(MORETWOSE).
The democracy hypothesis is analyzed using a democracy index (DEMOCRACY) from POLITY IV.
The index measures the general openness of political institutions and ranges between zero and ten
with a greater number indicating greater democracy. The validation of the democracy hypothesis
implies a positive and significant coefficient.
To measure the level of governance standards of a country we use the aggregate governance
indicators of Kaufmann, Kraay and Mastruzzi (2003). The data describe six dimensions of
governance: government effectiveness, control of corruption, regulatory quality, rule of law, voice
and accountability, and political stability. The six governance indicators are measured in units
ranging from about -2.5 to 2.5, with higher values corresponding to better governance outcomes.
This data have been used in several studies and one of the advantages is that it covers more than
10
International Capital Market Controls is an aggregation of Access of Citizens to Foreign Capital Markets and
Foreign Access to Domestic Capital Markets and in Restrictions in Foreign Capital Market Exchange/Index of capital
controls among 13 IMF categories.
13
100 countries from 1996 to 2004. According to the hypothesis, these variables should have a
positive relation with the probability of demutualization and going public.
However these variables are highly correlated between them, therefore, we create another variable
that is the average of the six aggregate indicators of governance (GOVERNANCE).
The next variables relate solely to the hypotheses of going public.
As we refer in the previous section, stock exchanges might not go public because of costs. To test
the adverse selection costs and the fixed costs hypotheses, we investigate if larger and older stock
exchanges are more likely to go public. To proxy these variables we use the logarithm stock market
capitalization (MARKET_CAP) and the logarithm of age of a stock exchange (YEARS). Liquidity
costs are proxied by the ratio of stock market trade to the Gross Domestic Product (GDP)
(LIQUIDITY). LIQUIDITY is expected to have a positive coefficient with the decision of going
public.
To analyze the hypothesis of “risk sharing” we investigate if riskier stock exchanges are more likely
to go public. We assume that risk of the stock exchange is the risk of its trading products, and we
use the standard deviation of market returns (RISK). We expect to see a positive relation between
RISK and the decision of going public.
To proxy reputation we consider that older stock exchanges and the ones with foreign listing have
more concerns about reputation, since stock exchanges with foreign listing are usually viewed as
international financial centers. We use a dummy variable to indicate whether the stock exchange
has foreign listing (FOREIGN LISTING).
To analyze if stock exchanges go public to raise capital, we use information about Initial Public
Offerings from Mendiola and O’Hara (2004). IPO is a dummy variable that indicates whether the
exchange made an IPO or not, and the sign should be positive according to our hypothesis.
14
Finally, we control for country development using GDP per capita (GDPpc) with data from the
World Bank.
Overall, explanatory variables concern stock exchanges specific characteristics but also country
features. This raises problems in the treatment of some Pan-European exchanges such as Euronext
and OMX, as our initial database contains information on Euronext and OMX subsidiaries. To
analyze the decision of demutualization, subsidiaries will be considered individually because
demutualization was the first step; in other words stock exchanges demutualized before they
merged or were acquired. However, in the decision to go public we consider only the parent
companies, as only they are listed, implying an aggregation of country data for those stock
exchanges11.
B.
Summary Statistics
Table II presents the summary statistics of our sample. Besides the mean for the entire sample, we
also present the mean of non-demutualized, demutualized and publicly listed stock exchanges. The
T-test analyses the null hypothesis of equality of the means of groups12.
The sample of stock exchanges consists of 19 publicly listed, 33 private companies, 25 associations,
16 government agencies and 16 member-owned stock exchanges. Demutualized exchanges are
almost half of our sample.
(Table II around here)
This first inspection of the data seems to indicate that non-demutualized, demutualized and public
listed exchanges show some significant differences concerning the explanatory variables.
Looking at competition indicators, there is a difference in the means of the groups. There is great
economic freedom, capital control freedom and democracy levels in demutualized stock exchanges
than in non-demutualized, and great in publicly listed than in demutualized exchanges. The T-test
11
We have also done the analysis without aggregating stock exchanges. The results are the same except for the IPO
variable.
12
The T-test p-values are not presented for dummy variables.
15
supports this idea rejecting the null hypothesis that the means of groups are equal in all variables.
Political and economic liberalization is therefore increasing from non-demutualized to demutualized
and then to publicly listed exchanges.
Governance standards are also higher in demutualized than in non-demutualized stock exchanges
and on publicly listed exchanges than on demutualized exchanges. The T-test also rejects the
hypothesis that the means of the groups are equal.
Demutualized exchanges, and in particular public listed exchanges are larger, less risky, more
liquid, older and they tend to have foreign firms listed. However, the test rejects the null for risk
and liquidity hypothesis if we consider a 5% confidence level. Concerning domestic competition,
the existence of one or more than two stock exchanges, does not seem to distinguish the groups.
The summary statistics also reveal that demutualized exchanges, and in particular publicly listed
exchanges, belong to higher income countries. Concerning regional distribution, there seems to be a
prevalence of demutualized stock exchanges in Asia and Western Europe and public listed
exchanges in Western Europe.
III. EMPIRICAL RESULTS
This section describes the methodology, analyses the correlation between explanatory variables and
tests the proposed hypotheses.
A.
Methodology
We use a probit model to explain the likelihood of demutualization and going public. The
dependent variable of the model is a dummy variable that indicates whether the exchange is
demutualized (DEMUTUALIZATION) or publicly listed (PUBLIC).
Pr(DEMUTUALIZATION)=F(aX)
Pr(PUBLIC)=F(aX)
(1)
(2)
16
where F(.) is the cumulative distribution function of a standard normal variable, a are the
coefficients and X are the independent variables discussed in the previous section.
B.
Correlations
Table III reports correlation between variables. Our analysis focuses on the correlation between
independent variables because of potential multicollinearity problems.
The competition indicators are positively correlated with governance standards and GDP per capita.
Countries that have higher governance standards are more liberalized economically and also have
higher income per capita.
Stock exchanges in countries with more economic freedom have more foreign firms listed, are
older, more liquid, and present less volatility. The same is true of stock exchanges in countries with
higher governance standards; we would especially like to highlight that the correlation of
governance standards with volatility is very negative.
Countries with higher GDP per capita as well as countries in Western Europe also present more
liquid, more risk and older stock exchanges. Older stock exchanges present higher standards of
governance and liberalization of stock markets.
Countries in Western Europe have higher governance standards and have greater economic
freedom, which makes it difficult to isolate regional competition.
(Table III around here)
C.
Univariate Analysis
Table IV reports the results of an univariate probit model. All the models are estimated with a
constant although this is not presented in the table. Besides the coefficients, we present the standard
error, the statistical significance of the coefficient, the McFadden R-square, which is analog to Rsquare reported in the linear regression models.
17
The goal of this analysis is to have a snapshot of the importance of the main variables. As we have
seen in the correlation analysis some of the variables are strongly correlated and we cannot use
them all in the probit estimation due to multicollinearity, therefore it is important to filter the main
ones.
We start by analyzing the hypothesis that competition increases the probability of stock exchanges
to demutualize and go public. The coefficient of ECONOMIC FREEDOM is positive and
statistically significant from zero both for demutualization and going public. As we have referred
previously, the index can be broken down into more specific sub-items such as CAPITAL
CONTROLS. Stock exchanges in countries with less restrictions to capital flows are more likely to
demutualize and go public.
(Table IV around here)
Therefore the sign of coefficients are consistent between them, and we do not reject the hypothesis
that the probability of demutualization and going public increases with strong stock market
competition. Interestingly, the more general index of economic freedom has more explanatory
power in the decision of demutualization, while capital controls explain better the decision to go
public than the general index.
A higher level of democracy increases the probability that stock exchanges demutualize and go
public supporting the hypothesis that group interests, like intermediation rights, are less protected in
democracies.
The governance standards hypothesis is also not rejected. The index13 is positive supporting the
hypothesis that higher governance standards increase the likelihood that stock exchanges
demutualize and go public.
13
All the components of the governance index have a positive and statistically significant coeffcient. Among them we
highlight Regulatory Quality as having great explanatory power.
18
We find empirical support for validating the hypotheses of fixed, adverse selection and liquidity
costs. Market capitalization, age and stock market liquidity weight on the decision of
demutualization and going public. Although statistically significant in both models, liquidity of
stock markets measured by the ratio of stock market trade to GDP is more important in explaining
the decision to go public than demutualization, which strengthens the conjecture that stock
exchanges only go public if their stock market is liquid.
Concerning the hypothesis that stock exchanges go public to improve reputation, YEARS and
FOREIGN LISTING are statistically significant in both decisions, but the R–square is higher in the
decision to go public. Therefore, reputation might be an important motivation for exchanges going
public.
Stock exchange risk does not seem very important in explaining the decision for demutualization
but is important in going public. However, the sign is contrary to our conjecture; less risky stock
exchanges are more likely to go public. This might happen because riskier stock exchanges are
often the ones where there is less stock market liberalization and lower governance standards, as
shown in the correlation analysis.
Also the hypothesis that stock exchanges go public to raise capital is rejected; the coefficient is not
statistically significant and the sign is negative.
Concerning domestic competition, the number of stock exchanges in the country does not seem to
be related with the decision to go public. As for regional competition, we only found evidence that
stock exchanges in Western Europe are more likely to go public. However, we cannot disregard the
fact that competition is stronger in Western Europe because countries have more economic
freedom, which is corroborated by the correlation analysis. Stock exchange in Western Europe and
North America are more likely to demutualize while the choice of a non-demutualized regime is
more likely in Africa and South America.
19
GDPpc is positive and statistically significant showing that stock exchanges are more likely to
demutualize and go public in higher income countries.
Overall, this first inspection supports the hypothesis that stock market liberalization, higher
governance standards and democracy increase the probability of stock exchanges demutualizing and
going public. In addition, larger, older, more liquid sock exchanges, with foreign listing and lower
risk are more likely to go public. We do not find support for hypotheses that stock exchanges go
public because of domestic competition, to raise capital or to share risk. In general, the goodness-offit of the explanatory variables seems to be higher in the decision to go public than to demutualize.
D.
Probit Results
Before presenting the main results, we would like to recall that in sub-section B we report that there
is a strong correlation between variables such as governance standards, economic freedom, and
wealth of investors; therefore we cannot use them all in the probit estimation, due to multicollinearity. Further, we will follow the indications given by the univariate analysis concerning the
most important variables.
Table V reports the maximum likelihood estimates of the probit model for the decision of
demutualization. It presents the coefficients, the statistical significance of the coefficient, the
number of observations, the McFadden R-square and the likelihood ratio. The likelihood ratio tests
the null hypothesis that the coefficients are equal to zero.
(Table V around here)
The first estimation shows that ECONOMIC FREEDOM and DEMOCRACY are statistically
significant variables and the R-square is around 40%. Adding the GOVERNANCE in Probit 2 does
not improve the estimation; the coefficient is not statistically significant and the R-square does not
increase. Therefore the hypothesis of governance standards is rejected.
20
Therefore, an increase in competition and democracy levels increases the likelihood of
demutualization of stock markets14 consistent with Steil (2002b) and Rajan and Zingales’ (2003)
conjectures.
Table VI reports maximum likelihood estimates of the probit model for the decision to go public.
We start by introducing the variables that are statistically significant from zero in the
demutualization model: DEMOCRACY and ECONOMIC FREEDOM. In Probit 1 ECONOMIC
FREEDOM is not statistically significant, contrary to DEMOCRACY and GOVERNANCE.
However, when we replace ECONOMIC FREEDOM by CAPITAL CONTROLS, the R-square
increases substantially and the coefficient is significant, but GOVERNANCE is no longer
statistically significant (Probit 2). Therefore stock exchanges that go public present a higher level of
liberalization of capital controls and democracy than the rest of stock exchanges and the hypothesis
of governance standards is rejected.
(Table VI around here)
All hypotheses related with costs as well as the with risk sharing are rejected. The coefficients of
MARKET_CAP, LIQUIDITY, YEARS and RISK are not statistically significant from zero.
The hypothesis that stock exchanges go public to raise capital is also rejected15. Despite the
coefficient being statistically significant from zero, it is negative, which indicates that on the
contrary stock exchanges do not go public to raise capital.
Overall, we find that the decision to demutualize and go public is driven by greater capital control
freedom and political freedom. Democracy seems to weaken the strength of interest groups and
increase competition between intermediaries (Rajan and Zingales, 2003). The importance of
economic freedom is consistent with Steil’s (2002b) hypothesis that free access to international
14
As already suggested by the univariate analysis, WESTERN EUROPE, ONESE or MORETWOSE are not
statistically significant (not tabulated).
15
The hypothesis of reputation is also rejected. Besides the dummy variable to indicate foreign listing we also used
total volume traded of foreign firms and the percentage of foreign firms listed on the total of listed firms. The results
also took the same direction, giving no support for the reputation hypothesis.
21
financial markets and pressure from financial foreign firms catalyze strong changes in financial
markets by increasing competition. We also find that general economic freedom is more related
with demutualization and free capital movements with going public. Surprisingly, we do not find
common reasons for what has been theoretically advocated and empirically found for firm’s
flotation.
E.
Conditional Analysis
The main objective of the subsequent analysis is to find out more about the reasons that separate
demutualized exchanges from going publicly listed. Going public is a step after demutualization,
i.e. it only happens if exchanges demutualize. Therefore, the previous analysis might not be totally
indicative of the motives for stock exchange equitization.
To examine this issue, we reduce the sample to only those exchanges that demutualized (52 stock
exchanges) and repeat the probit estimation where the dummy variable is a variable that equals one
if the exchange is publicly listed.
Pr(PUBLIC/DEMUTUALIZATION)=F(aX)
(3)
Again F(.) is the cumulative distribution function of a standard normal variable, a are the
coefficients and X are the independent variables already discussed in the previous section. Table VII
reports several estimations of probit models in the sample of demutualized stock exchanges.
(Table VII around here)
Demutualized stock exchanges go public because there is greater freedom of capital market flows,
and therefore stock exchanges are more subject to trade migration. The coefficient is always
statistically significant in all the model specifications. In Probit 1, we do not find statistical
significance of GOVERNANCE and DEMOCRACY. Thus, demutualized exchanges do not seem to
go publicly listed because they are affected by country governance standards or political freedom.
Again we observe that fixed, adverse selection and liquidity costs do not affect the going public
decision, contrary to evidence for firms. Chemmanur, He and Nandy (2005) find that larger and
22
older firms are more likely to go public and also Pagano, Panetta and Zingales (1998) find that
larger firms are more likely to go public.
Contrary to the finding of Rosen, Smart and Zutter (2005) for banks sharing risk does not seem to
affect the decision as stock market volatility is not statistically significant.
The most notable fact is that contrary to the unconditional analysis, in the conditional analysis we
find evidence that raising new finance is a strong motivation to flotation of demutualized stock
exchanges. This evidence is in line with previous findings for firms (see Boehenmer and Ljungqvist
(2000), Kim and Weisbach (2005), Chemmanur, He and Nandy (2005)).
F.
Non-Demutualized exchanges
Our analysis also addresses what drives exchanges to choose other governance regimes. Similarly to
demutualized exchanges research, first we do a univariate probit analysis (not tabulated) where the
dependent variables are dummy variables representing governance regimes such as association,
government and member-owned.
Results show that there seems to exist some regional preferences. Associations are likely to come
from South America, while governmental and member stock exchanges are likely to come from the
Middle East. Secondly, stock exchanges that are member-owned are more likely to come from
countries where there are low levels of economic freedom. Third, we also find that younger stock
exchanges choose to be governmental agencies, maybe representing an attempt of governments to
stimulate stock markets and growth. The sign of YEARS is negative and statistically significant.
Fourth, associations present less volatility.
Table VIII reports results of the estimation of the multivariate probit analysis restricting to the main
variables. The results show that main drivers are regional preferences. Members and governmental
stock exchanges are likely to come from the Middle East, but not from South America. On the other
hand, associations come from South America and not from the Middle East. The coefficients of
ECONOMIC FREEDOM and DEMOCRACY show that although these countries enjoy less political
23
and economic freedom, they are not significant. GOVERNANCE has a negative and significant
coefficient only for governmental stock exchanges.
The goodness–of-fit of the model is high for association and governmental agencies, but
substantially lower for member-owned exchanges, at least compared with previous results.
(Table VIII around here)
IV. STOCK EXCHANGE COMPETITION AND MERGERS
In this section we focus on a particular form of stock exchange competition, mergers, and its
relationship with demutualization and going public.
A.
Mergers and demutualization
Historically, mergers have been a means of competition between stock exchanges. Mergers create
economies of scale, from sharing central services such as office management, optimizing the use of
a fixed-cost network, and sharing common facilities. Consequently, they can cut costs and enhance
liquidity. Arnold, Hersh, Mulherin and Netter (1998) focus on mergers to study the causes and
effects of the competition for order flow by US regional exchanges. The authors conclude that stock
exchanges that merged were successful in attracting market share, at least in comparison to the
regional exchanges that did not merge.
In this subsection we investigate the relation between demutualization and mergers. For instance,
the merger of Copenhagen Stock Exchange and COPFUTOP in 1997 followed the exchange
demutualization in 1996; similarly the merger between Helsinki Stock Exchange and SOM in 1997
followed the demutualization of the stock exchange in 1995. Guided by these observations, we
analyze whether mergers are a strong motivation for demutualization.
Our focus is on “domestic” mergers, i.e. mergers that have been implemented within borders,
between stock and derivatives exchanges in the same country and between regional exchanges of
24
the same country. We construct a dummy variable that equals one if there was a domestic merger of
the stock exchange after demutualization (MERGER).
The decision of demutualization is again analyzed using a probit, but also introducing MERGER as
an explanatory variable. If our conjecture is true, we should find a positive and significant
coefficient for the MERGER variable.
Table IX reports the results of the estimation; besides using MERGER as an explanatory variable,
we use DEMOCRACY and ECONOMIC FREEDOM, which were significant in section IV, as
control variables.
The results indicate that merging seems to be a strong motivation for stock exchanges
demutualization, the coefficient is positive and statistically significant different from zero in all the
model specifications. The DEMOCRACY control variable has a statistically significant and positive
coefficient and ECONOMIC FREEDOM is only significant alone with the variable MERGER.
As mergers are seen as an important strategy in competition, we interpret these results as an
additional indication that that stock exchange competition is driving demutualization.
(Table IX around here)
B. Mergers and going public
Subrahmanyan and Titman (1999) build up a model that when firms require internal restructuring,
flotation is less attractive. This implication is consistent with the observation that firms often go
private in leveraged buyouts prior to internal reorganization and then go public after reorganization
is completed. Following this insight, we investigate the hypothesis that flotation happens after
domestic mergers.
To analyze if the decision to merge is explained by the decision to go public, we again use the
MERGER variable in a probit model. The focus is on the coefficient of the PUBLIC variable. We
control other factors using variables like MARKET_CAP, YEARS, LIQUIDITY and IPO.
25
Table X reports the results of the estimation. Our results only provide weak evidence that stock
exchanges seem to merge before going public. The coefficient is positive and statistical significant
at 10% level. Interestingly, we find evidence that mergers do not seem to precede an IPO. The
coefficient is negative and statistical significant at 1%. Also large exchanges are more likely to
merge consistent with the view that economies of scale in stock exchanges are an increasing
function of market capitalization, thus mergers between large exchanges save more costs
(Malkamaki, 1999). Stock exchange age or liquidity do not seem to interfere in the merger decision.
(Table X around here)
V. GOING PUBLIC AND CHANGE OF CONTROL
Stock exchanges can go public to finance future acquisitions. In an enquiry to chief officers, Brau
and Fawcett (2006) find that the primary motivation for going public is to facilitate acquisitions.
Rosen, Smart and Zutter (2005) find empirical evidence that going public in the banking industry is
associated to change of control and acquisitions.
This section analyzes the assumption that stock exchanges go public to make acquisitions. The
dependent variable in the probit model is a dummy variable that indicates whether the stock
exchange has made an acquisition (ACQUISITION) of another exchange or company16. We are
interested in the coefficients of the PUBLIC and IPO variables. A positive value of the coefficients
validates the conjecture that flotation and IPOs aim to raise funds to make acquisitions. The control
variables are MARKET_CAP, YEARS, LIQUIDITY, CAPITAL CONTROLS and DEMOCRACY.
Table XI reports the results of the estimation. The coefficient PUBLIC is positive and significant
indicating that stock exchanges go public to make acquisitions. IPO also has a positive coefficient
in the first model specification although with statistical significance at 10%. We also find, like other
studies, that larger stock exchanges are more likely to make acquisitions.
16
The most common cases have been technology or media companies.
26
There is also a strand of the literature that advocates that flotation is a part of a sell-out strategy.
Zingales (1995) and Mello and Parson (1998) view an IPO as the first stage in a subsequent sale of
the firm. Empirically, Pagano, Paneta and Zingales (1998) conclude that firms choose to go public
to rebalance their leverage and allow managers to liquidate their positions.
We would like to investigate the hypothesis that exchanges go public in order to owners liquidate
their positions. However, until now there have only been a few attempts to buy public stock
exchanges: the OMX hostile takeover to the LSE in 2000, the competition between Euronext and
the Deutsche Börse for the LSE in 2005. Therefore, as yet there is no positive evidence for this
hypothesis.
Alternatively, firms can be sold out directly to private purchasers as referred by Stoughton and
Zechner (1998) and documented empirically by Boehmer and Ljungqvist (2002). We would like to
investigate the plausibility of this relation. However, there is a multicollinearity problem in testing
this hypothesis. All stock exchanges that were acquired were demutualized which creates a problem
of multicollinearity. The coefficient is positive, the R-square is high but we cannot compute the
statistical significance of the coefficients.
(Table XI around here)
VI. ROBUSTNESS ANALYSIS
In this section we analyze if our results are robust to other measures of stock exchange competition.
First, we assume that markets that are more integrated internationally are less competitive as they
offer less diversification benefits. Building on this insight, we use correlation with the world
portfolio (CORRELATION) to proxy stock exchange competition.
Further, stock markets where domestic investors have fewer restrictions to invest abroad are more
vulnerable to trade migration. The level of home bias can be an indirect measure of the level of
exposure to trade migration and to competition from peers. Our variable HOME BIAS reports
equity holdings held by domestic investors; therefore higher values means a higher level of home
27
bias, and according to our hypothesis we expect a negative sign with respect to the probability of
demutualization and going public. Stock exchanges in countries with less home bias have more
competition and are more likely to go public.
To measure the level of liberalization of stock markets we use the measure of liberalization
intensity of Bekaert, Harvey and Lundblad (2005), which reflects the level of stock markets’
openness to foreign investors (LIB_INTENSITY).
The results of a univariate probit estimation show that all variables show statistical significance (not
tabulated). Among these, we highlight liberalization intensity that has an R-square of 37% in the
decision to go public and of 22% in the decision for demutualization. HOME BIAS has a negative
sign, as expected, because it reports the level of equity holdings. The R-square of HOME BIAS is
14% and 22%
for DEMUTUALIZATION and PUBLIC respectively,
and of
the variable
CORRELATION 13% and 22%. All together the variables indicate that stock market competition
and liberalization are related with demutualization and going public.
VII.
CONCLUSIONS
In this paper we investigate why stock exchanges demutualize and go public listed using a
sample of 109 stock exchanges. Based on previous research on stock exchange competition
and Initial Public Offerings, we analyze the plausibility of several theories explaining the
likelihood of demutualization and going public.
We provide evidence that stock exchange competition is driving stock exchange
demutualization. Both economic freedom and less protection of incumbent’s interests are
more likely to create competition causing stock exchange demutualization. The decision to go
public is related to capital controls freedom, and consequently with the threat of trade
migration, and the need to raise new finance.
28
Stock exchanges seem to demutualize to make mergers, which we interpret as an additional
signal of competition. We also find evidence that stock exchanges go public (and make IPOs)
to make acquisitions and that they seem to restructure internally before going public.
Finally, we conclude by referring that the paper offers several new interesting insights: First,
in line with the work of Rajan and Zingales (2000, 2001), it analyses how technology and
deregulation affects the nature of organizations, more specifically the case of stock exchanges.
Second, it compares flotation reasons in stock exchange industry with other industries. Third,
it is illustrative of the importance of corporate governance in industry competition.
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33
Table I: Largest stock exchanges in the world
This table presents a ranking of stock exchanges ordered by market capitalization (year 2004). Source: WFE.
Stock exchange name
Governance regime
Market capitalization
(USD million dollar)
New York Stock Exchange
Publicly Listed
12707578
Tokyo Stock Exchange
Private limited
3557 674
NASDAQ Stock Market
Publicly listed
3532912
London Stock Exchange
Publicly listed
2865243
Osaka Securities Exchange
Publicly listed
2287048
Deutsche Börse
Publicly listed
1194517
TSX Venture Exchange
Publicly listed
1177518
Euronext
Publicly listed
1147037
Spanish Exchanges
Private limited
940673
Stock Exchange of Hong Kong
Publicly listed
861463
34
Table II: Descriptive statistics
This table presents the descriptive statistics of the variables of the sample. For description of the variables see Table 1Appendix A. The first four columns present averages. The average for the entire sample. The average for nondemutualized stock exchanges; the average for demutualized stock exchanges; the average for public exchanges. The
next two columns present probability of the T-test where the null is the average of demutualized and non- demutualized
stock exchanges are equal and the probability of the T-test where the null is the average of public and demutualized
stock exchanges are equal (p-values are not presented for dummy variables); last column presents the number of
observations of the entire sample (N).
Average
All
Non-demutualized Demutualized Publicly listed
Sample
Exchanges
Exchanges
Exchanges
T-test (p-values)
Non-demutualized Demutualized
vs Demutualized
vs Public
N
Governance regime
DEMUTUALIZATION
0.48
109
MEMBER
0.15
109
PUBLIC
0.17
109
GOVERNMENT
0.15
109
PRIVATE
0.30
109
ASSOCIATION
0.23
109
Variables
AFRICA
0.16
0.26
0.04
0.00
ASIA
0.19
0.18
0.21
0.17
CAPITAL CONTROLS
3.25
2.04
4.50
7.44
0%
0%
94
DEMOCRACY
5.69
3.28
8.38
9.56
0%
3%
95
ECONOMIC FREEDOM
5.88
5.34
6.51
6.98
0%
6%
FOREIGN LISTING
0.55
0.42
0.67
1.00
GDPPC
109
109
94
100
13143
6738
20092
28047
0%
5%
98
GOVERNANCE
0.34
0.02
0.70
1.27
0%
0%
107
IPO
0.12
0.00
0.25
0.56
LIQUIDITY
0.32
0.22
0.42
0.90
7%
6%
MARKET_CAP
10.22
9.26
11.22
12.51
0%
2%
MIDDLE EAST
0.11
0.19
0.02
0.00
109
MORETWOSE
0.18
0.12
0.25
0.28
109
NORTH AMERICA
0.06
0.02
0.12
0.11
109
OCEANIA
0.03
0.00
0.06
0.11
109
ONESE
0.61
0.67
0.54
0.56
RISK
25.36
28.70
23.29
20.60
SOUTH AMERICA
0.13
0.19
0.06
0.06
WESTERN EUROPE
0.17
0.05
0.31
0.56
YEARS
3.76
3.44
4.11
4.76
35
109
105
106
109
6%
19%
59
109
109
0%
1%
107
Table III: Correlations
This table presents the correlation between variables (for a detailed description of variables see Appendix A- Table 1).
DEMUTUALIZATION MEMBER PUBLIC
GOVERNMENT PRIVATE
ASSOCIATION ECONOMIC FREEDOM CAPITAL CONTROLS DEMOCRACY GOVERNANCE
DEMUTUALIZATION
1.00
-0.40
0.47
-0.40
0.70
-0.52
0.48
0.36
0.46
0.43
MEMBER
-0.40
1.00
-0.18
-0.17
-0.28
-0.23
-0.15
-0.09
-0.20
-0.10
PUBLIC
0.47
-0.18
1.00
-0.18
-0.30
-0.24
0.44
0.57
0.31
0.53
GOVERNMENT
-0.40
-0.17
-0.18
1.00
-0.28
-0.23
-0.10
-0.16
-0.30
-0.15
PRIVATE
0.70
-0.28
-0.30
-0.28
1.00
-0.37
0.15
-0.08
0.24
0.04
ASSOCIATION
-0.52
-0.23
-0.24
-0.23
-0.37
1.00
-0.34
-0.23
-0.13
-0.30
ECONOMIC FREEDOM
0.48
-0.15
0.44
-0.10
0.15
-0.34
1.00
0.75
0.43
0.77
CAPITAL CONTROLS
0.36
-0.09
0.57
-0.16
-0.08
-0.23
0.75
1.00
0.28
0.71
0.52
DEMOCRACY
0.46
-0.20
0.31
-0.30
0.24
-0.13
0.43
0.28
1.00
GOVERNANCE
0.43
-0.10
0.53
-0.15
0.04
-0.30
0.77
0.71
0.52
1.00
RISK
-0.35
-0.08
-0.36
0.41
-0.02
0.16
-0.57
-0.65
-0.37
-0.67
0.50
LIQUIDITY
0.18
-0.07
0.44
-0.01
-0.13
-0.15
0.49
0.58
0.12
YEARS
0.29
0.01
0.39
-0.24
0.00
-0.14
0.42
0.48
0.36
0.57
FOREIGN LISTING
0.26
-0.04
0.42
-0.27
-0.07
-0.05
0.43
0.50
0.30
0.58
MARKET_CAP
0.37
-0.11
0.39
-0.14
0.08
-0.24
0.54
0.52
0.28
0.57
MORETWOSE
0.16
-0.13
0.11
-0.20
0.09
0.08
0.11
0.15
0.13
0.12
ONESE
-0.13
0.07
-0.05
0.23
-0.10
-0.10
-0.09
-0.04
-0.16
-0.02
IPO
0.39
-0.15
0.60
-0.15
-0.06
-0.20
0.27
0.24
0.25
0.38
GDPPC
0.43
-0.03
0.44
-0.16
0.10
-0.34
0.71
0.74
0.45
0.85
AFRICA
-0.31
0.11
-0.19
0.18
-0.18
0.13
-0.43
-0.23
-0.38
-0.32
SOUTH AMERICA
-0.20
-0.08
-0.10
-0.16
-0.14
0.44
-0.12
-0.10
0.11
-0.17
NORTH AMERICA
0.20
0.00
0.09
-0.11
0.15
-0.14
0.34
0.31
0.17
0.26
OCEANIA
0.18
-0.07
0.23
-0.07
0.01
-0.09
0.15
0.14
0.14
0.12
MIDDLE EAST
-0.28
0.19
-0.16
0.43
-0.17
-0.19
-0.15
-0.15
-0.40
-0.15
ASIA
0.05
-0.20
-0.03
-0.01
0.07
0.12
0.10
0.03
-0.05
-0.08
WESTERN EUROPE
0.34
-0.12
0.45
-0.12
0.00
-0.19
0.36
0.43
0.35
0.59
36
Table III: Correlations (cont.)
This table presents the correlation between variables (for a detailed description of variables see Appendix A- Table 1).
RISK
LIQUIDITY
YEARS
FOREIGN LISTING MARKET_CAP
MORETWOSE
ONESE
IPO
GDP PC
AFRICA
SOUTH AMERICA NORTH AMERICA OCEANIA
MIDDE EAST ASIA
WESTERN EUROPE
DEMUTUALIZATION
-0.35
0.18
0.29
0.26
0.37
0.16
-0.13
0.39
0.43
-0.31
-0.20
0.20
0.18
-0.28
0.05
0.34
MEMBER
-0.08
-0.07
0.01
-0.04
-0.11
-0.13
0.07
-0.15
-0.03
0.11
-0.08
0.00
-0.07
0.19
-0.20
-0.12
PUBLIC
-0.36
0.44
0.39
0.42
0.39
0.11
-0.05
0.60
0.44
-0.19
-0.10
0.09
0.23
-0.16
-0.03
0.45
GOVERNMENT
0.41
-0.01
-0.24
-0.27
-0.14
-0.20
0.23
-0.15
-0.16
0.18
-0.16
-0.11
-0.07
0.43
-0.01
-0.12
PRIVATE
-0.02
-0.13
0.00
-0.07
0.08
0.09
-0.10
-0.06
0.10
-0.18
-0.14
0.15
0.01
-0.17
0.07
0.00
ASSOCIATION
0.16
-0.15
-0.14
-0.05
-0.24
0.08
-0.10
-0.20
-0.34
0.13
0.44
-0.14
-0.09
-0.19
0.12
-0.19
ECONOMIC FREEDOM
-0.57
0.49
0.42
0.43
0.54
0.11
-0.09
0.27
0.71
-0.43
-0.12
0.34
0.15
-0.15
0.10
0.36
CAPITAL CONTROLS
-0.65
0.58
0.48
0.50
0.52
0.15
-0.04
0.24
0.74
-0.23
-0.10
0.31
0.14
-0.15
0.03
0.43
DEMOCRACY
-0.37
0.12
0.36
0.30
0.28
0.13
-0.16
0.25
0.45
-0.38
0.11
0.17
0.14
-0.40
-0.05
0.35
GOVERNANCE
-0.67
0.50
0.57
0.58
0.57
0.12
-0.02
0.38
0.85
-0.32
-0.17
0.26
0.12
-0.15
-0.08
0.59
RISK
1.00
-0.28
-0.59
-0.54
-0.37
-0.06
-0.05
-0.15
-0.62
-0.03
0.09
-0.33
-0.27
0.28
0.29
-0.27
LIQUIDITY
-0.28
1.00
0.35
0.25
0.60
0.09
0.04
0.14
0.53
-0.20
-0.20
0.06
0.01
0.05
0.10
0.38
YEARS
-0.59
0.35
1.00
0.48
0.57
0.16
-0.16
0.20
0.53
-0.36
0.01
0.15
0.03
-0.13
0.11
0.43
FOREIGN LISTING
-0.54
0.25
0.48
1.00
0.33
0.03
-0.02
0.17
0.49
-0.16
0.11
0.25
0.16
-0.10
-0.18
0.34
MARKET_CAP
-0.37
0.60
0.57
0.33
1.00
0.49
-0.34
0.18
0.57
-0.46
-0.15
0.19
0.04
-0.04
0.23
0.36
MORETWOSE
-0.06
0.09
0.16
0.03
0.49
1.00
-0.59
-0.10
0.16
-0.20
0.10
0.26
0.07
-0.17
0.19
-0.09
ONESE
-0.05
0.04
-0.16
-0.02
-0.34
-0.59
1.00
0.18
0.02
0.24
-0.03
-0.25
-0.09
0.28
-0.37
0.22
IPO
-0.15
0.14
0.20
0.17
0.18
-0.10
0.18
1.00
0.31
-0.16
-0.14
-0.10
-0.06
-0.13
-0.11
0.50
GDP PC
-0.62
0.53
0.53
0.49
0.57
0.16
0.02
0.31
1.00
-0.31
-0.25
0.31
0.05
-0.08
-0.19
0.70
AFRICA
-0.03
-0.20
-0.36
-0.16
-0.46
-0.20
0.24
-0.16
-0.31
1.00
-0.17
-0.11
-0.07
-0.15
-0.21
-0.20
SOUTH AMERICA
0.09
-0.20
0.01
0.11
-0.15
0.10
-0.03
-0.14
-0.25
-0.17
1.00
-0.10
-0.06
-0.14
-0.19
-0.18
NORTH AMERICA
-0.33
0.06
0.15
0.25
0.19
0.26
-0.25
-0.10
0.31
-0.11
-0.10
1.00
-0.04
-0.09
-0.13
-0.12
-0.08
OCEANIA
-0.27
0.01
0.03
0.16
0.04
0.07
-0.09
-0.06
0.05
-0.07
-0.06
-0.04
1.00
-0.06
-0.08
MIDDLE EAST
0.28
0.05
-0.13
-0.10
-0.04
-0.17
0.28
-0.13
-0.08
-0.15
-0.14
-0.09
-0.06
1.00
-0.17
-0.08
ASIA
0.29
0.10
0.11
-0.18
0.23
0.19
-0.37
-0.11
-0.19
-0.21
-0.19
-0.13
-0.08
-0.17
1.00
-0.22
WESTERN EUROPE
-0.27
0.38
0.43
0.34
0.36
-0.09
0.22
0.50
0.70
-0.20
-0.18
-0.12
-0.08
-0.08
-0.22
1.00
37
Table IV: Why do stock exchanges demutualize and go public? Univariate Analysis
This table presents the maximum likelihood estimation of the probit model where the dependent variable is a dummy
variable that indicates if the stock exchange is demutualized/ a publicly listed exchange, F(.) is the cumulative
distribution function of a standard normal variable, a are the coefficients and X is the independent variable.
Pr(DEMUTUALIZATION)=F(aX)
(1)
Pr(PUBLIC)=F(aX)
(2)
The sample consists on 109 stock exchanges for DEMUTUALIZATION and 102 stock exchanges for PUBLIC. All the models
are estimated with constant and one independent variable (X). Variables are described in detail in Appendix A- Table 1.
For each independent variable we present the coefficient, the standard error (SE) and the McFadden R-square. Standard
errors are adjusted for heterocedasticity. (a) means singular covariance matrix.
Dependent Variable
ECONOMIC FREEDOM
DEMUTUALIZATION
Coefficient
SE
R-square
0.56***
0.14
Coefficient
PUBLIC
SE
R-square
18.3%
0.73***
20.00
24.6%
33.3%
CAPITAL CONTROLS
0.15**
0.04
10.4%
0.27***
0.06
DEMOCRACY
0.14***
0.04
17.8%
0.31**
0.13
19.5%
GOVERNANCE
0.77***
0.17
14.5%
1.25***
0.30
30.9%
FOREIGN LISTING
0.68***
0.26
5.2%
11.68
(a)
24.4%
IPO
12.37***
0.13
14.1%
-11.13
0.00
2.3%
LIQUIDITY
0.47*
0.25
2.6%
0.89***
0.27
13.88%
MARKET CAP
0.20***
0.05
10.7%
0.25***
0.08
16.1%
MORETWOSE
0.55*
0.32
2.0%
0.61*
0.36
3.6%
ONESE
-0.31
0.24
1.0%
-0.36
0.32
0.0%
-0.04*
0.02
6.9%
-0.05**
0.02
10.9%
YEARS
RISK
0.31***
0.11
5.8%
0.55***
0.19
13.3%
GDPpc
0.00***
0.00
14.6%
0.00***
0.00
19.4%
AFRICA
-1.28***
0.42
7.5%
-11.39
0.00
6.9%
-1.43
0.54
6.3%
-11.36
0.00
4.7%
1.20 **
0.60
3.2%
0.44
0.53
0.1%
12.80
NA
3.0%
1.46*
0.76
4.0%
SOUTH AMERICA
-0.82 ***
0.40
3.0%
-0.55
0.53
1.2%
WESTERN EUROPE
1.27***
0.37
8.8%
1.41***
0.34
17.8%
MIDDLE EAST
NORTH AMERICA
OCEANIA
Superscripts *, **, *** denote statistical significance at 10%, 5%, and 1% levels respectively.
38
Table V: Why do stock exchanges demutualize?
This table presents the maximum likelihood estimation of the probit model where the dependent variable is a dummy
variable that indicates if the stock exchange is demutualized, F(.) is the cumulative distribution function of a standard
normal variable, a are the coefficients and X are the independent variables.
Pr(DEMUTUALIZATION)=F(aX)
The sample consists on 109 stock exchanges. Independent variables (X) are presented in column, for a detailed
description see Appendix A -Table 1. Last rows present the number of observations, the McFadden R-square and LR
statistic (the Likelihood Ratio tests the joint null hypothesis that all slope coefficients except the constant are zero).
Standard errors are presented in parenthesis below coefficients and are adjusted for heterocedasticity.
Dependent variable
Constant
ECONOMIC FREEDOM
DEMOCRACY
DEMUTUALIZATION
Probit 1
Probit 2
-4.92***
-4.91***
(-1.15)
(-1.63)
0.41**
0.41*
(-0.2)
(-0.41)
0.31***
0.31**
(-0.11)
(-0.11)
GOVERNANCE
0.00
(-0.14)
Observations
84
84
R-square
40.10%
40.10%
LR statistic
46.2***
46.2***
Superscripts *, **, *** denote statistical significance at 10%, 5%, and 1% levels respectively.
39
Table VI: Why do stock exchanges go public?
This table presents the maximum likelihood estimation of the probit model where the dependent variable is a dummy
variable that indicates if the stock exchange is public listed, F(.) is the cumulative distribution function of a standard
normal variable, a are the coefficients and X are the independent variables.
Pr(PUBLIC )=F(aX)
The sample consists on 102 stock exchanges. Independent variables (X) are presented in column (more details see
Appendix A -Table 1). Last rows present the number of observations, the McFadden R-square and LR statistic (the
Likelihood Ratio tests the joint null hypothesis that all slope coefficients except the constant are zero). Standard errors
are presented in parenthesis below coefficients and are adjusted for heterocedasticity.
Dependent Variable
Constant
ECONOMIC FREEDOM
PUBLIC
Probit 1
Probit 2
Probit 3
Probit 4
Probit 5
Probit 6
Probit 7
-3.13**
-2.60***
-2.98***
-2.86***
-2.88***
-2.94*
-2.90***
-1.25
-0.39
-0.82
-0.8
-0.54
-1.55
-0.59
0.17*
0.21***
0.22***
0.23***
0.15**
0.21***
-0.09
-0.07
-0.07
-0.07
-0.07
-0.08
0.18
-0.23
CAPITAL CONTROLS
DEMOCRACY
0.06**
0.08**
0.11**
0.14*
0.12*
0.18
0.1
-0.03
-0.37
-0.05
-0.08
-0.06
-0.14
-0.07
GOVERNANCE
0.76*
0.35
-0.43
-0.43
MARKET_CAP
0.02
-0.07
YEARS
-0.04
-0.2
LIQUIDITY
-0.16
-0.43
RISK
0
-0.02
IPO
-6.26**
-0.54
Observations
78
83
81
80
77
48
76
R-square
30.40%
24.20%
34.50%
36.00%
34.90%
23.60%
35.30%
LR statistic
20.34***
24.29***
23.44***
24.32***
22.04***
12.20***
19.50***
Superscripts *, **, *** denote statistical significance at 10%, 5%, and 1% levels respectively.
40
Table VII: Why do stock exchanges go public? Conditional Analysis.
This table presents the maximum likelihood estimation of the probit model where the dependent variable is a dummy
variable that indicates if the stock exchange is a public listed exchange. Independent variables (X) are presented in
column (for a detailed description see Appendix A- Table 1), , F(.) is the cumulative distribution function of a standard
normal variable, a are the coefficients and X are the independent variables.
Pr(PUBLIC)=F(aX)
The sample consists of 52 demutualized stock exchanges. Last rows present the number of observations, the
McFadden R-square and LR statistic (the Likelihood Ratio tests the joint null hypothesis that all slope coefficients
except the constant are zero). Standard errors are presented in parenthesis below coefficients and are adjusted for
heterocedasticity.
Dependent variable
Constant
CAPITAL CONTROLS
GOVERNANCE
PUBLIC
Probit 1
Probit 2
Probit 3
Probit 4
Probit 5
Probit 6
Probit 7
-1.60***
-1.76**
-2.13*
-1.67***
-4.00***
-1.83**
-0.74
(0.43)
(0.78)
(1.10)
(0.46)
(0.72)
(0.71)
(1.22)
0.16*
0.21***
0.21***
0.19**
0.26***
0.22***
0.15*
(0.09)
(0.07)
(0.07)
(0.08)
(0.10)
(0.07)
(0.08)
0.40
(0.47)
DEMOCRACY
0.04
(0.09)
MARKET_CAP
0.05
(0.10)
LIQUIDITY
0.60
(0.54)
IPO
14.07***
(0.54)
YEARS
0.06
(0.19)
RISK
-0.02
(0.04)
Observations
R-square
LR statistic
42
36
42
40
42
41
32
26.4%
24.5%
25.7%
30.0%
50.9%
27.6%
16.5%
14.1%***
11.2***
13.7***
15.1***
27.2***
14.5***
7.13**
Superscripts *, **, *** denote statistical significance at 10%, 5%, and 1% levels respectively.
41
Table VIII: Probit Analysis –Non-Demutualized exchanges
This table presents the maximum likelihood estimation of the probit model where the dependent variable is a dummy
variable that indicates if the stock exchange is member-owned, governmental or association, F(.) is the cumulative
distribution function of a standard normal variable, a are the coefficients and X are the independent variables.
Pr(GOVERNANCE REGIME)=F(aX)
(1)
The sample consists on 109 stock exchanges. Independent variables (X) are presented in column, for a detailed
description see Appendix A -Table 1. Last rows present the number of observations, the McFadden R-square and LR
statistic (the Likelihood Ratio tests the joint null hypothesis that all slope coefficients except the constant are zero).
Standard errors are presented in parenthesis below coefficients and are adjusted for heterocedasticity.
Dependent Variable
Constant
ECONOMIC FREEDOM
DEMOCRACY
GOVERNANCE
MIDDLE EAST
SOUTH AMERICA
Observations
R-square
LR statistic
MEMBER
GOVERNMENT
ASSOCIATION
-0.07
-1.71
0.86
(1.14)
(1.14)
(1.09)
-0.17
0.13
-0.23
(0.21)
(0.205)
(0.21)
-0.05
-0.01
-0.05
(0.04)
(0.04)
(0.04)
0.19
-0.75**
-0.22
(0.37)
(0.35)
(0.33)
1.08***
0.91
-8.12***
(0.55)
(0.57)
(0.48)
-0.13
-7.45***
1.37***
(0.55)
(0.39)
(0.40)
84
83
84
16.1%
22.0%
29.6%
11.11**
13.43***
29.75***
Superscripts *, **, *** denote statistical significance at 10%, 5%, and 1% levels respectively.
42
Table IX: Do stock exchanges demutualize to make mergers?
This table presents the maximum likelihood estimation of the probit model where the dependent variable is a dummy
variable that indicates if the stock exchange is demutualized., , F(.) is the cumulative distribution function of a standard
normal variable, a are the coefficients and X are the independent variables.
Pr(DEMUTUALIZATION)=F(aX)
The sample consists on 109 stock exchanges. Independent variables (X) are presented in column, for a detailed
description see Appendix A -Table 1. Last rows present the number of observations, the McFadden R-square and LR
statistic (the Likelihood Ratio tests the joint null hypothesis that all slope coefficients except the constant are zero).
Standard errors are presented in parenthesis below coefficients and are adjusted for heterocedasticity.
Dependent Variable
Constant
DEMUTUALIZATION
Probit 1
Probit 2
Probit 3
-1.04***
-2.50***
-3.54***
(0.27)
(0.79)
(1.25)
0.34**
0.19
(0.14)
(0.19)
ECONOMIC FREEDOM
DEMOCRACY
MERGER
Observations
R-square
LR statistic
0.11***
0.26**
(0.03)
(0.10)
1.34***
1.39***
1.22**
(0.39)
(0.39)
(0.47)
96
95
84
28.1%
29.0%
46.4%
37.30***
37.90***
53.45***
Superscripts *, **, *** denote statistical significance at 10%, 5%, and 1% levels respectively.
43
Table X: Do stock exchanges merge before going public ?
This table presents the maximum likelihood estimation of the probit model where the dependent variable is a dummy
variable that indicates if there was a merge , F(.) is the cumulative distribution function of a standard normal variable, a
are the coefficients and X are the independent variables.
Pr(MERGER)=F(aX)
(1)
The sample consists on 102 stock exchanges. Independent variables (X)are presented in column, for a detailed
description see Appendix A -Table 1. Last rows present the number of observations, the McFadden R-square and LR
statistic (the Likelihood Ratio tests the joint null hypothesis that all slope coefficients except the constant are zero).
Standard errors are presented in parenthesis below coefficients and are adjusted for heterocedasticity.
MERGER
Dependent Variable
Constant
PUBLIC
MARKET_CAP
IPO
LIQUIDITY
Probit 1
Probit 2
-5.58***
-5.86***
(1.01)
(1.18)
0.98*
0.94*
(0.52)
(0.52)
0.43***
0.39***
(0.09)
(0.09)
-7.64***
-7.73***
(0.27)
(0.30)
-0.42
-0.38
(0.40)
(0.40)
YEARS
0.15
(0.17)
Observations
R-square
LR statistic
87
84
37.1%
38.3%
32.87***
32.40***
Superscripts *, **, *** denote statistical significance at 10%, 5%, and 1% levels respectively.
44
Table XI: Do stock exchanges go public to make acquisitions?
This table presents the maximum likelihood estimation of the probit model where the dependent variable is a dummy
variable that indicates if the stock exchange made an acquisition after going public, F(.) is the cumulative distribution
function of a standard normal variable, a are the coefficients and X are the independent variables.
Pr(AQUISITION)=F(aX)
(1)
The sample consists on 102 stock exchanges. Independent variables (X) are presented in column, for a detailed
description see Appendix A -Table 1. Last rows present the number of observations, the McFadden R-square and LR
statistic (the Likelihood Ratio tests the joint null hypothesis that all slope coefficients except the constant are zero).
Standard errors are presented in parenthesis below coefficients and are adjusted for heterocedasticity.
Dependent Variable
AQUISITION
Probit 1
Constant
PUBLIC
MARKET_CAP
IPO
Probit 2
Probit 3
-4.22***
-4.40***
(1.33)
(1.31)
-6.99***
(2.44)
1.79***
1.83***
2.13***
(0.69)
(0.55)
(0.55)
0.18**
0.20*
0.28
(0.09)
(0.10)
(0.17)
1.29*
1.28*
(0.76)
(0.77)
LIQUIDITY
-0.11
-0.75
(0.42)
(0.52)
CAPITAL CONTROLS
-0.07
(0.14)
DEMOCRACY
0.28
(0.20)
YEARS
-0.09
(0.25)
Observations
R-square
LR statistic
89
87
74
41.37%
41.10%
48.54%
20.29
20.01
20.22
Superscripts *, **, *** denote statistical significance at 10%, 5%, and 1% levels respectively.
45
Appendix A
Table 1: Description and Source of Variables
Variable
Description
Source
ASSOCIATION
Dummy equals 1 if stock exchange is an association, 0 otherwise.
Ramos(2006a)
GOVERNMENT
Dummy equals 1 if stock exchange is a governmental agency , 0 otherwise.
Ramos(2006a)
MEMBER
Dummy equals 1 if stock exchange is a member-owned company, 0 otherwise.
Ramos(2006a)
PRIVATE
Dummy equals 1 if stock exchange is a private company, 0 otherwise.
Ramos(2006a)
PUBLIC
Dummy equals 1 if sock exchange is a public listed company, 0 otherwise.
Ramos(2006a)
DEMUTUALIZATION
Dummy equals 1 if the governance regime is demutualized, 0 otherwise.
Ramos(2006a)
DEMOCRACY
Democracy index (year 1999). The democracy index derived from codings of the competitiveness of political
participation, the regulation of participation, the openness and competitiveness of executive recruitment, and
constraints on the chief executive. Range = -10 to 10 (-10 = high autocracy; 10 = high democracy)
Source: Polity IV
ECONOMIC
FREEDOM
Index of Economic Freedom (year 1990)
Economic Freedom Network
Governance regime
Variables
www.freetheworld.com
CAPITAL CONTROLS
International Capital Market Controls (year 1990). A-sub item of Freedom to Trade internationally.
Economic Freedom Network
www.freetheworld.com
LIB_INTENSITY
Intensity Equity Market Liberalization Indicator. Ratio of the market capitalization of the constituents firms
comprising the IFC inventible index to those that comprise the IFC Global index for each country. The IFC
Global index, subject to some exclusion restrictions, is designed to represent the overall market portfolio for
each country, whereas the IFC Investable index is designed to represent a portfolio of domestic equities that are
available to foreign investors. A ratio of one means that all of the stocks are available to foreign investors.
46
Bekaert, Harvey and Lundblad (2005)
Variable
Description
Source
CORRELATION
Correlation of country stock market indexes with world portfolio. Correlation is calculated using returns from
DataStream country indexes and world portfolio returns. Returns are monthly observations from 1995 till 2002.
Datastream
HOME BIAS
Equity holdings of investors on domestic assets (year 2002)
International Monetary Fund’s (IMF)
coordinated Portfolio Investment
Surveys (CPIS)
GOVERNANCE
Average of the previous six indicators of governance: Government effectiveness, Control of Corruption,
Regulatory Quality, Rule of Law, Voice and Accountability and Political Stability (year 1996).
Kaufmann, Kraay and Mastruzzi (2003)
Government Effectiveness concerns the quality of public service provision, the quality of bureaucracy, the
competence of civil servants, the independence of the civil service from political pressures, and the credibility of
the Governments commitment to policies. Control of Corruption measures perceptions of corruption
conventionally defined as the exercise of public power for private gain. Regulatory Quality includes measures of
the incidence of market unfriendly policies such as price controls or in adequate bank supervision, as well as
perceptions of the burdens imposed by excessive regulation in areas as foreign trade and business development.
Rule of Law measures the extent to which agents have confidence in and abide by the rule of society. These
include perceptions of the incidence of crime, the effectiveness and predictability of the judiciary, and the
enforceability of contracts. Voice and Accountability measures the extent to which citizens of a country are able
to participate in the selection of governments. Political Stability measures the perceptions of the likelihood that
government in power will be destabilized or overthrown by possibly unconstitutional and/or violent means,
including domestic violence and terrorism.
LIQUIDITY
Ratio of value of share trading on Gross Domestic Product (year 2004).
Ramos(2006a)
MARKET_CAP
Logarithm of domestic market capitalization in USD million dollar (year 2004).
Ramos(2006a)
YEARS
Logarithm of years since open (first trading date) of stock exchange till 2004
Ramos(2006a)
RISK
Standard deviation of returns. Returns are monthly observations from DataStream country indexes from 1995 till
2002. Value multiplied by 100.
Datastream
FOREIGN LISTING
Dummy equals 1 if stock exchange has foreign listed firms, 0 otherwise.
Ramos(2006a)
MORETWOSE
Dummy equals 1 if there are more than 2 financial exchanges in the country, 0 otherwise.
Ramos(2006a)
ONESE
Dummy equals 1 if there is only one stock exchange in the country, 0 otherwise.
Ramos(2006a)
IPO
Dummy equals 1 if the stock exchange made an Initial Public Offering.
Mendiola and O’Hara (2004)
GDPPC
Gross Domestic Product per capita (year 2001)
World Bank
AFRICA
Dummy variable that takes the value of 1 if stock exchange is located in Africa, 0 otherwise.
47
Variable
Description
Source
SOUTH AMERICA
Dummy variable that takes the value of 1 if stock exchange is located in South America, 0 otherwise.
NORTH AMERICA
Dummy variable that takes the value of 1 if stock exchange is located in North America , 0 otherwise.
OCEANIA
Dummy variable that takes the value of 1 if stock exchange is located in Oceania, 0 otherwise.
MIDDLE EAST
Dummy variable that takes the value of 1 if stock exchange is located in Middle East, 0 otherwise.
ASIA
Dummy variable that takes the value of 1 if stock exchange is located in Asia, 0 otherwise.
WESTERN EUROPE
Dummy variable that takes the value of 1 if stock exchange is located in Western Europe, 0 otherwise.
48
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