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Testing limits to policy reversal: Evidence from Indian privatizations

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  • Dastidar, Siddhartha G.
  • Fisman, Raymond
  • Khanna, Tarun

Abstract

We examine the effect of regime change on privatization. In the 2004 Indian election, the pro-reform BJP was unexpectedly defeated by a less reformist coalition. Stock prices of government-controlled companies that had been slated for privatization by the BJP dropped 3.5% relative to private firms. Government-controlled companies that were under study for possible privatization fell 7.5% relative to private firms. This is consistent with investor belief of a "point of no return," where advanced reforms are more difficult to reverse. Further analysis suggests that layoffs, combined with the privatization announcement, served as a credible commitment to privatize.

Suggested Citation

  • Dastidar, Siddhartha G. & Fisman, Raymond & Khanna, Tarun, 2008. "Testing limits to policy reversal: Evidence from Indian privatizations," Journal of Financial Economics, Elsevier, vol. 89(3), pages 513-526, September.
    • Handle: RePEc:eee:jfinec:v:89:y:2008:i:3:p:513-526
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    Cited by:

    1. Helen Wei Hu & Lin Cui & Preet S Aulakh, 2019. "State capitalism and performance persistence of business group-affiliated firms: A comparative study of China and India," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(2), pages 193-222, March.
    2. Alvaro Cuervo-Cazurra & Ajai Gaur & Deeksha Singh, 2019. "Pro-market institutions and global strategy: The pendulum of pro-market reforms and reversals," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(4), pages 598-632, June.
    3. Boubakri, Narjess & Cosset, Jean-Claude & Guedhami, Omrane & Saffar, Walid, 2011. "The political economy of residual state ownership in privatized firms: Evidence from emerging markets," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 244-258, April.
    4. Neeru Chaudhry & Chris Veld, 2023. "Political uncertainty and investments by private and state‐owned enterprises," International Review of Finance, International Review of Finance Ltd., vol. 23(3), pages 584-614, September.
    5. Huang, Zhangkai & Li, Lixing & Ma, Guangrong & Qian, Jun, 2021. "The reversal of privatization in China: A political economy perspective," Journal of Corporate Finance, Elsevier, vol. 71(C).
    6. Elitsa R Banalieva & Alvaro Cuervo-Cazurra & Ravi Sarathy, 2018. "Dynamics of pro-market institutions and firm performance," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(7), pages 858-880, September.

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    More about this item

    Keywords

    Government commitment Layoffs Emerging markets Electoral turnover Government policy credibility;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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