The Role of Stock Exchanges in Corporate Governance

Historically, the main contribution of exchanges to corporate governance has been listing and disclosure standards and monitoring compliance. Stock exchanges have established themselves as promoters of corporate governance recommendations for listed companies. Demutualisation and subsequent self-listing of exchanges have spurred a debate on the role of exchanges. Regulators have been concerned about conflicts of interest between exchanges' for-profit activities and their regulatory responsibilities. The conversion of exchanges to listed companies is thought to have intensified competition and raised questions around a potential "regulatory race" to the bottom.Recently, the rise of ATS have had a profound impact on the stock exchange industry. Their existence has induced exchanges to cut fees and in some cases launch their own off-exchange platforms. The effect of ATS on corporate governance is not clear. Two practical concerns voiced so far are, first, that trading fragmentation may reduce the transparency of the markets for corporate control and have adverse consequences for price discovery. Second, exchanges are uneasy about the prospect of having to continue performing their traditional regulatory and other corporate governance enhancing functions amid a shrinking revenue base