International Stock Exchange IPOs: Prof. Isaac Otchere delves into the new trading floor
Since the Australian Stock Exchange became a publicly traded entity in 1998 and listing its shares on its own exchange, Sprott finance professor Isaac Otchere has been driven to explore what he calls a “wave” of “self-listing” by stock exchanges and to study why they show a tendency to outperform in the long run.
By 2008, 25 stock exchanges were public entities, including the New York, the London, the Toronto and the Hong Kong stock exchanges, as well as NASDAQ.
Historically, investors bartered for deals on real trading floors of mutually-owned exchanges that were primarily organized as cooperatives, run by a handful of organizations such as banks. Fast forward to our global age of electronic communication networks (ECNs), and the face of the financial exchange industry changes significantly. The mutual governance structures have adapted to technological improvements and ECNs, creating a new and highly competitive virtual space for investors.
“Competition has become keener by the day,” explains Otchere. “Exchanges are looking for ways to become more competitive and becoming a corporation has allowed them to maximize profits.”
Otchere has found that as exchanges have demutualized and become publicly traded companies, their operating performance has improved considerably. Managers, under pressure to deliver good returns to shareholders, seek out different sources of revenue. Consequently, the exchanges focus on bringing in the highest profits to create more wealth for their owners, which can affect their trading practices.
Not surprisingly, conflict of interest issues have come to the fore as stock exchanges go public and list their shares on their own stock markets. “How do you regulate yourself?” asks Otchere. “What happens when the stock exchange flouts its own rules? What happens to the integrity of the market when the exchange regulates the firms that it depends on for revenues, such as listing fees and data revenues?”
With these questions in mind, Otchere plans to systematically analyze these issues with feedback from stock markets participants around the world, including developing countries that are considering following in the footsteps of the bigger markets.
“I need to hear from the stock exchange managers, the security exchange commissions (SECs) and other key players in countries where exchanges have demutualized and listed their shares on their own stock market, about whether the conflicts of interest are, real or perceived. Even if they are only perceived, we still have to deal with them, as perception can affect market quality.
“You want the market to be a fair place where investors can trade and and companies raise capital to finance their projects. If the integrity of the market is affected, the SECs have to do something about it.”
In this respect, Australia Stock Exchange has handed over the regulatory role to the SEC, a responsibility formerly held by the stock exchange itself.
Since the Ghana-born Otchere set up his office at Carleton nine years ago, he has published a series of papers on the transformation of stock exchanges into corporations, including his upcoming co-submission on “the risk taking behaviour of demutualized and self-listed stock exchanges.”
Last summer, he published a paper in the Journal of International Financial Markets, Institutions & Money with co-authors George Owusu-Antwi (Nova Southeastern University) and Sana Mohsni (Sprott School of Business), which examined why stock exchange initial public offerings (IPOs) are so under-priced and yet outperform in the long run. After comparing a sample of financial exchange IPOs with a control sample of firms that went public in the same period, Otchere and his colleagues found stock exchange IPOs under-priced by an average of 30 percent compared to regular IPOs that were under-priced by 14 per cent. In the meantime, returns after five years of becoming a publicly traded entity are as high as 90 percent for the stock exchanges versus the loss of 40 percent for regular IPOs.
“The significant under-pricing of the stock exchange IPOs could stem from the fact that managers of financial exchanges don’t usually own shares in the firm prior to the IPO,” says Otchere, “and there is no incentive for management to reduce the level of under-pricing and to leave less money on the table.”
Otchere also points to what he calls the Signalling Hypothesis to explain why the stock exchanges are significantly under-priced. He argues that the business model of the exchanges is profitable and the exchanges signal their quality by drastically under-pricing their issues.
In a different vein, since 2011, Otchere has been studying how cross-border acquisitions –by American, European and Chinese companies, for example — affect the competitiveness of Canadian companies.
“When these foreigners take over Canadian firms,” he explains, “not only do we lose our national icons, but also these acquisitions lead to layoffs, as do domestic acquisitions. Nevertheless, firms taken over by foreign companies pay higher wages after the takeover and the productivity level of employees who remain with companies taken over by foreign acquirers improves.”
Otchere has received a number of teaching awards, including the University’s Provost Fellowship in Teaching Award in 2012, Carleton University Teaching Achievement Award, and Teaching Excellence Award from the Carleton University Students Association.
His research awards include the 2013 Graduate Mentoring Award from the Faculty of Graduate Studies and a best paper award at the 3rd Global Accounting, Finance & Economics Conference in Melbourne Australia last year. He was recently named a Carnegie African Diaspora Fellow.
Isaac Otchere is a Professor of Finance in the Sprott School of Business at Carleton University.
Story by: Susan Hickman