Area of Study:
Economics, Finance & Banking
Proposed Research Title for the Degree of Master of Finance by Research -------------------------------------------------
The Dynamics of Stock Market Demutualization and Its Interplay with Stock Market Efficiency: Critical Assessment of the Performance of Global Demutualized Market, Lessons Learned and Policy Implications for Bangladesh
Master by Research Candidate
Md. Abdullah Raihan
Assistant Professor of Economics
International Islamic University Chittagong
Date of Submission
15th February, 2013
1. Introduction and Problem Statement
The demutualization of stock exchange is a recent new phenomenon in the spare of global financial world with a history of approximately 20 years, meaning that till the early 1990s; most of the world stock exchanges were non profit, mutual organization with monopoly power, owned by their members (Islam& Islam, 2012). The demutualization of an exchange is a process by which a non-profit member-owned organization is transformed into a for-profit shareholder corporation. Ownership is somewhat open (WFE Survey, 2005). IOSCO (2000) defines demutualization as the transformation of an exchange into a for-profit shareholder-owned company. The pace of exchange demutualization in developed market jurisdictions has been quite rapid. In the fifteen years since the first exchange demutualization took place in 1993 in Stockholm, Switzerland, 21 exchanges in developed market jurisdictions have demutualised – representing almost 40% of the membership of the World Federation of Exchanges (WEF, 2003). In contrast, the pace of demutualization in emerging market jurisdictions has been relatively slower.
Available literature found that a demutualized exchange can borrow from conventional lenders such as banks. Whereas mutualized stock exchanges have to look up to their guarantor for finances (Ahmed at al,, 2011). To borrow from a bank, stock exchanges have to improve their financial policies in order to increase the credibility of the exchange which enhances the corporate governance. In addition to the advantages discussed above, access to human capital is also an important outcome of demutualization. Good governance and access to economic capital assist exchanges to attract better qualified human resource (Faina and Lopez, 2006).These professionals will help to take better decisions. Better management would also increase the efficacy of the exchange by introducing better practices and policies (LSE, 2007). Demutualization would also enhance the profit motive for growth and development. After demutualization exchanges have to earn their own bread and butter.
2. Motivation and Contribution
In Bangladesh, Stock indices are directed by the elected body of stock brokers where conflict of interest happens (Alam, 2012). There is very poor corporate governance in the Stock Indices that is an important reason of recent debacle of stock market (Ibrahim, 2011).As stock dealers and brokers are familiar as institutional investors and play a big rule in the capital market mechanism, they should be regulated properly. In Bangladesh, DSE conduct inspection on brokerage houses and DSE is also run by a selected committee of brokerage house, so one cannot expect proper judgment from the DSE. Study found that by the all the top investors are brokerage houses who are mainly monitored by DSE that creates many conflicts of interests. So, if brokerage houses make any big irregularity, DSE is supposed to hide it as it a member of DSE. In 2010, many positive factors along with regulatory supports (SEC, DSE) inflated the market and finally caused big losses for general investors. In case of irregularities (serial Trading, price manipulation) by brokerage houses/members, DSE had failed to make any proper investigation and also failed to...