The Determinants of Demutualization

Abstract

A central thought in modern economic theory is the assumption that firms are owned by investors seeking profits who confer the right of control upon a management. Accordingly, the design of corporate institutions is based upon the idea of separation of ownership and control (Berle and Means, 1932; Jensen and Meckling, 1976). However, in a modern capitalist society we observe a variety of ownership and governance structures that mark an alternative to this investor-oriented view. Various firms of the tertiary sector like consultancies and law firms are owned and governed by their employees. Cooperatives operate successfully in sectors like insurance, banking or housing and are owned by their customers. While the various underlying institutional designs and governance structures as well as their economic characteristics have been analyzed at length (Hansmann, 1996), our understanding of the transformation of ownership structures remains vague and incomplete. Little attention has been paid to the reasoning behind firms’ abandoning their traditional ownership structure and converting to others. The same applies to our understanding of the processes of transformation.¹ In this paper I seek answers to these questions by studying an exemplary industry that has recently been subject to a widespread change of ownership structures. The industry in the focus of my analysis is the securities exchange industry, which has witnessed a wave of demutualizations during the last decade.

I would like to thank Christine Bortenlänger of Börse München and Lorenzo Gallai of the World Federations of Exchanges for helpful discussions and valuable comments. I am grateful to the World Federation of Exchanges and various securities exchanges around the globe for providing data.

Notable exceptions are the privatization of public companies and the demutualization of insurance companies, which have been in public focus and have therefore received a considerable amount of academic attention.