Working Paper: CEPR ID: DP2222
Authors: Thierry Foucault; Christine Parlour
Abstract: We develop a model in which two profit maximizing exchanges compete for IPO listings. They choose the listing fees paid by firms wishing to go public and control the trading costs incurred by investors. All firms prefer lower costs, however firms differ in how they value a decrease in trading costs. Hence, in equilibrium, competing exchanges obtain positive expected profits by charging different trading fees and different listing fees. As a result, firms that list on different exchanges have different characteristics. The model has testable implications for the cross--sectional characteristics of IPOs' on different quality exchanges and the relationship between the level of trading costs and listing fees. We also find that competition does not guarantee that exchanges choose welfare maximizing trading rules. In some cases, welfare is larger with a monopolist exchange than with oligopolist exchanges.
Keywords: exchanges; regulation; trading technology; listings; competition
JEL Codes: G10; G32; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competing exchanges with different trading costs (D41) | coexistence of exchanges (F31) |
| differentiation of exchanges (F31) | varying characteristics of firms listed (L25) |
| firms prefer to list on exchanges with lower trading costs (G15) | larger firm sizes (L25) |
| lower trading costs (F12) | higher listing fees (D40) |
| competition among exchanges (D41) | influence on trading technologies and listing fees (G18) |
| competition does not guarantee welfare-maximizing trading rules (D40) | social welfare could be greater under monopolistic exchange (D69) |