Essays on stock exchange efficiency, business models, and governance [Elektronische Ressource] / Baris Serifsoy

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Essays on Stock Exchange E–ciency, Business Models, andGovernanceInaugural-Dissertationzur Erlangung des Doktorgradesdes Fachbereiches Wirtschaftswissenschaftender Johann Wolfgang Goethe-Universit˜atFrankfurt/Main1Baris SerifsoyDarmstadt20061Wilhelm Merton-Chair for International Banking and Finance; Johann Wolfgang Goethe-University, Frankfurt/Main; URL: http://www.flnance.uni-frankfurt.de/pers/serifsoy.html; Email:serifsoy@flnance.uni-frankfurt.deErstgutachter: Prof. Dr. Reinhard H. SchmidtZweitgutachter: Prof. Dr. Peter GomberTag der Promotion: 11.12.20062Rahmetli Nano’ma ithaf ediyorumContentsList of Figures ivList of Tables vList of Abbreviations vi1 Introduction and Summary of Results 12 Settling for E–ciency 112.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122.2 Three concepts for evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152.3 The securities transaction industry . . . . . . . . . . . . . . . . . . . . . . . . . . 172.3.1 Economies of the securities transaction value chain . . . . . . . . . . . . . 172.3.2 Vertical interdependencies in the value chain . . . . . . . . . . . . . . . . 192.3.3 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202.4 Strategic conduct - The provider’s action set . . . . . . . . . . . . . . . . . . . . 212.4.1 Boundary decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212.4.

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Essays on Stock Exchange E–ciency, Business Models, and
Governance
Inaugural-Dissertation
zur Erlangung des Doktorgrades
des Fachbereiches Wirtschaftswissenschaften
der Johann Wolfgang Goethe-Universit˜at
Frankfurt/Main
1Baris Serifsoy
Darmstadt
2006
1Wilhelm Merton-Chair for International Banking and Finance; Johann Wolfgang Goethe-
University, Frankfurt/Main; URL: http://www.flnance.uni-frankfurt.de/pers/serifsoy.html; Email:
serifsoy@flnance.uni-frankfurt.deErstgutachter: Prof. Dr. Reinhard H. Schmidt
Zweitgutachter: Prof. Dr. Peter Gomber
Tag der Promotion: 11.12.20062
Rahmetli Nano’ma ithaf ediyorumContents
List of Figures iv
List of Tables v
List of Abbreviations vi
1 Introduction and Summary of Results 1
2 Settling for E–ciency 11
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Three concepts for evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.3 The securities transaction industry . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.3.1 Economies of the securities transaction value chain . . . . . . . . . . . . . 17
2.3.2 Vertical interdependencies in the value chain . . . . . . . . . . . . . . . . 19
2.3.3 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.4 Strategic conduct - The provider’s action set . . . . . . . . . . . . . . . . . . . . 21
2.4.1 Boundary decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.4.2 Communication standards and accessibility . . . . . . . . . . . . . . . . . 22
2.4.3 Ownership structure and governance . . . . . . . . . . . . . . . . . . . . . 24
2.4.4 Interdependencies in the action set . . . . . . . . . . . . . . . . . . . . . . 25
2.5 Proposals for an e–cient organizational design . . . . . . . . . . . . . . . . . . . 27
2.5.1 System 1 - Regulated monopoly. . . . . . . . . . . . . . . . . . . . . . . . 27
2.5.2 2 - Competitive fragmentation . . . . . . . . . . . . . . . . . . . . 28
2.5.3 System 3 - Contestable monopolies . . . . . . . . . . . . . . . . . . . . . . 30
2.6 Comparative organizational analysis . . . . . . . . . . . . . . . . . . . . . . . . . 32
3 Governance of Exchanges 36
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.2.1 Data Envelopment Analysis and Malmquist-Productivity . . . . . . . . . 41
3.2.1.1 Data Envelopment Analysis . . . . . . . . . . . . . . . . . . . . . 41
3.2.1.2 The Malmquist-productivity index . . . . . . . . . . . . . . . . . 43
3.2.2 Two-stage approach for assessing e–ciency difierences . . . . . . . . . . . 46
3.2.3 Regression analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.3 Data and empirical results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.3.1 The sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.3.2 Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.3.2.1 Operational variables . . . . . . . . . . . . . . . . . . . . . . . . 48
iCONTENTS ii
3.3.2.2 Framework variables . . . . . . . . . . . . . . . . . . . . . . . . . 50
3.3.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.3.3.1 Results from the flrst stage . . . . . . . . . . . . . . . . . . . . . 53
3.3.3.2 from the second stage . . . . . . . . . . . . . . . . . . . 54
3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
4 Investment Behavior of Stock Exchanges 60
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
4.2.1 The basic setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
4.2.2 The static model - Investment propensity of exchanges . . . . . . . . . . . 69
4.2.2.1 Competition between stock exchanges with homogeneous users . 69
4.2.2.2 Competition between stock exc with heterogeneous users 73
4.2.2.3 A graphical illustration . . . . . . . . . . . . . . . . . . . . . . . 75
4.2.3 The dynamic model - Viability of organizational forms . . . . . . . . . . . 77
4.3 Empirical evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
4.3.1 Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
4.3.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
4.3.3 Data description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
4.3.4 Empirical Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
4.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
5 Stock Exchange Business Models 91
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
5.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.2.1 Data Envelopment Analysis and Malmquist-Productivity . . . . . . . . . 97
5.2.2 Regression analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
5.3 Data and empirical results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
5.3.1 The sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
5.3.2 Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
5.3.2.1 Operational variables . . . . . . . . . . . . . . . . . . . . . . . . 103
5.3.2.2 Framework v . . . . . . . . . . . . . . . . . . . . . . . . . 104
5.3.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.3.3.1 Results from the flrst stage . . . . . . . . . . . . . . . . . . . . . 107
5.3.3.2 from the second stage . . . . . . . . . . . . . . . . . . . 107
5.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
A Chapter 3 113
A.1 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
A.2 First Stage Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
A.3 Correlation matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
A.4 Robustness Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
B Chapter 4 120
B.1 Discriminatory ofiers by for-proflt exchanges . . . . . . . . . . . . . . . . . . . . . 121
B.2 Multiplicity of Equilibria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
B.3 Stock exchanges employed in regressions . . . . . . . . . . . . . . . . . . . . . . . 127
B.4 Correlation Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127CONTENTS iii
B.5 Robustness Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
B.6 Event Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
C Chapter 5 134
C.1 Data Envelopment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
C.2 Malmquist Productivity Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
C.3 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
C.4 First Stage Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
C.5 Correlation Matrices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
C.6 Robustness Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Bibliography 143
Curriculum Vitae 149
Ehrenw˜ortliche Erkl˜arung 151List of Figures
2.1 TCS-System 1: Regulated Consolidation . . . . . . . . . . . . . . . . . . . . . . . 28
2.2 2: Competitive Fragmentation . . . . . . . . . . . . . . . . . . . . . 29
2.3 TCS-System 3: Contestable Monopolies . . . . . . . . . . . . . . . . . . . . . . . 31
3.1 Governance Type of Exchanges 1999-2003. . . . . . . . . . . . . . . . . . . . . . . 37
3.2 Input-oriented Malmquist approach for CRS and VRS . . . . . . . . . . . . . . . 44
3.3 Input Variation and Computerized Trading . . . . . . . . . . . . . . . . . . . . . 56
4.1 Organizational Form and Diversiflcation of Stock Exchanges 1999-2003 . . . . . . 62
4.2 Event Studies on Governance Changes . . . . . . . . . . . . . . . . . . . . . . . . 62
4.3 Thresholds for Difierent Governance Structures and Competition Levels . . . . . 76
5.1 Related Activities by Exchanges 1999-2003 . . . . . . . . . . . . . . . . . . . . . 92
5.2 by Governance Type 1999-2003 . . . . . . . . . . . . . . . . . 93
5.3 Average Revenue Breakdown of Mutual and Listed Exchanges in Sample . . . . . 94
5.4 Two E–ciency Measurement Methods . . . . . . . . . . . . . . . . . . . . . . . . 95
5.5 Input-oriented Malmquist approach for CRS and VRS . . . . . . . . . . . . . . . 100
5.6 Representativeness of Sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
5.7 Costs and E–ciency of Exchanges with Diversiflcation Activity . . . . . . . . . . 109
ivList of Tables
2.1 Comparison of the three idealized TCS-systems . . . . . . . . . . . . . . . . . . . 34
3.1 Sample of exchanges used in the analysis, 1999-2003 . . . . . . . . . . . . . . . . 49
3.2 Variables used in the two-stage process . . . . . . . . . . . . . . . . . . . . . . . . 50
3.3 Results from the second-stage regression analysis . . . . . . . . . . . . . . . . . . 54
4.1 The OLG Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
4.2 Data Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.3 Bivariate Probit Regressions Results . . . . . . . . . . . . . . . . . . . . . . . . . 89
5.1 Sample of exchanges used in the analysis, 1999-2003 . . . . . . . . . . . . . . . . 102
5.2 Variables used in the two-stage process . . . . . . . . . . . . . . . . . . . . . . . . 103
5.3 Results from the second-stage regression analysis . . . . . . . . . . . . . . . . . . 108
A.1 Descriptive Statistics for Employed First and Second Stage Variables . . . . . . . 114
A.2 First Stage Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
A.3 Correlation matrix for flrst and second stage variables . . . . . . . . . . . . . . . 116
A.4 Robustness check by omitting variables . . . . . . . . . . . . . . . . . . . . . . . 117
A.5 check with varying competition variables . . . . . . . . . . . . . . . . 118
A.6 Bootstrap test. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
B.1 Payofi Structure with Two Members . . . . . . . . . . . . . . . . . . . . . . . . . 124
B.2 Exchanges Included in Probit Regressions (1999-2003) . . . . . . . . . . . . . . . 127
B.3 Correlation of Employed Variables (1999-2003 Pooled) . . . . . . . . . . . . . . . 127
B.4 Univariate Regressions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
B.5 Diversiflcation Data for Event Studies on Demutualization . . . . . . . . . . . . . 130
B.6 Div Data for Event on IPO . . . . . . . . . . . . . . . . . . . . 131
B.7 Operating Revenue Data for Event Studies on Demutualization . . . . . . . . . . 132
B.8 Op Revenue Data for Event on IPO . . . . . . . . . . . . . . . . . 133
C.1 Descriptive Statistics for Employed First and Second Stage Variables . . . . . . . 139
C.2 First Stage Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
C.3 Correlation matrix for flrst and second stage variables . . . . . . . . . . . . . . . 141
C.4 for second stage variables . . . . . . . . . . . . . . . . . . . . 141
C.5 Robustness check with alternative measures . . . . . . . . . . . . . . . . . . . . . 142
C.6 check with bootstrapping . . . . . . . . . . . . . . . . . . . . . . . . . 142
vList of Abbreviations
ATS Alternative Trading System
BOVESPA Bolsa de Valores de S~ao Paulo
CCP Central Counterparty
CESR Committee of European Securities Regulators
CPSS on Payment and Settlement Systems
CRS Constant Returns To Scale
CSD Central Securities Depository
DEA Data Envelopment Analysis
DMP Decision Making Power
DMU Unit
DTCC Depository Trust and Clearing Corporation
EACH European Association of Central Counterparty Clearing Houses
ECN Electronic Communication Network
ECOFIN The Economic and Financial Afiairs Council
EOB Electronic Order Book
ESFRC European Shadow Financial Regulatory Committee
FESE Federation of European Stock Exchanges
FIBV World Federation of Exchanges
IOSCO International Organization of Securities Commissions
IPO Initial Public Ofiering
LSE London Stock Exchange
MiFID Markets in Financial Instruments Directive
NYSE New York Stock Exchange
OECD Organisation for Economic Co-Operation and Development
OLG Overlapping Generations
OLS Ordinary Least Squares
OTC Over The Counter
PPP Purchasing Power Parity
R&D Research and Development
SEAQ-I Stock Exchange Automated Quotation - International
SFA Stochastic Frontier Analysis
SGX Singapore Exchange
Std. Dev. Standard Deviation
STP Straight-Through-Processing
SWX Swiss Exchange
TCS Trading, Clearing, Settlement
VRS Variable Returns To Scale
Y-o-Y Year-on-Year
viChapter 1
Introduction and Summary of
Results
1