A Survey of Stakeholders’ Opinions on the Effectiveness of Demutualization in Solving Agency Problems at the Nairobi Stock Exchange

Abstract

Demutualization is a term used to describe the transition of a securities exchange from a mutual association of exchange members operating on a not-for-profit basis to a limited liability, for-profit company accountable to shareholders. Demutualization challenges the traditional approach to supervision of securities exchanges and raises issues regarding their role in the regulation and supervision of capital markets. Domowitz and Steil (1999) propose that demutualized exchanges have better incentives to provide innovative services that increase the value of the exchange. Their proposition implies that demutualized exchanges are superior to mutualized exchanges in governance. Another inference that can be drawn from Domowitz and Steil’s work is that a demutualized exchange, due to its superior governance structure, should provide a better quality market. This paper reports the findings of a survey of stakeholders’ opinions on the effectiveness of demutualization in solving agency problems at the Nairobi Stock Exchange. Primary data was collected using structured questionnaires that were completed by respondents. The questionnaires comprised both open and closed ended questions and were administered through drop and pick. Some were sent to the respondent via electronic mail. The Microsoft Excel Program was used to carry out tests and derive frequency tables, mean score tabulations, and percentages to represent the response rate and information on the variables under study. Demutualization being a new concept in our local market, it can not eliminate all the agency problems at the NSE hence a lot needs to done especially on the enforcement of capital market rules and regulation in order to eliminate/reduce agency problems.