MERGERS BETWEEN STOCK EXCHANGES

Mergers Between Stock Exchanges

Mergers Between Stock Exchanges

Introduction

The business environment of stock exchanges has changed considerably in the last decade. The typical government or member owned, national stock exchanges have largely been replaced by for-profit, publicly listed exchanges. (Dahlquist, M. and G. Robertsson 2004, 55-67)

These transformed stock exchanges increasingly operate at an international level, offering world-wide menus rather than merely serving a national appetite. The transition has been accompanied by an immense increase in international stock exchange integration and co-operation. For example, stock exchanges have established strong operational ties with the usage of joint trading systems and the harmonization of regulations. Interestingly, this increased level of integration has recently taken a new turn as stock exchanges have sought partners to create fully merged identities. The most noteworthy merger activities include the Euronext merger, the OMX merger, the NYSE-Euronext merger, the NASDAQ-OMX merger and the merger between the London Stock Exchange and Borsa Italiana.

2 The impacts of such stock exchange mergers are largely unknown. There are many aspects of interest in such an analysis, both economic and regulatory issues which affect investors, firms, financial intermediaries and the overall economy. Thus, any profound study of the effects of stock exchange merger is bound to be selective and incomplete in its coverage. This paper narrows the focus by examining how consolidation of exchanges has affected the market liquidity of traded stocks. In particular, have all firms gained from merger in terms of stock liquidity? Or are the gains perhaps asymmetrically distributed? If so, which types of firms have benefited the most from stock exchange merger? Does it depend on firm size, industry, location or any other characteristics? These are the key questions that the paper sets out to answer. (Dahlquist, M. and G. Robertsson 2004, 55-67)

Literature review

This is done by empirically investigating the effects of the Euronext stock exchange merger on listed firms, i.e. the merger of the stock exchanges of Amsterdam, Brussels, Lisbon and Paris. Also, in addition to such a firm heterogeneity analysis, the paper also attempts to measure the competitive effects on neighboring markets, such as the effect on relative market shares of European exchanges. The main motivation for studying liquidity is that it ultimately affects the cost of capital. For example, if trading volume of a particular stock is low, then the stock is harder to sell (e.g. in bear markets) and the bid-ask spread is typically high. This makes the stock less desirable, which is reflected in price. Amihud and Mendelson (1986) estimate that the most illiquid stocks could gain 50% in value if, all else equal, liquidity would be raised to the level of the most liquid stocks. (Dahlquist, M. and G. Robertsson 2004, 55-67) also find that stock returns are a decreasing function of various measures of liquidity - such as turnover, which is the primary liquidity measure used in this paper. Liquidity is therefore of concern to both firms and the stock exchanges that serve ...