Working Paper: NBER ID: w13427
Authors: Siddhartha G. Dastidar; Raymond Fisman; Tarun Khanna
Abstract: We examine the effect of regime change on privatization using the 2004 election surprise in India. The pro-reform BJP was unexpectedly defeated by a less reformist coalition. Stock prices of government-controlled companies that had been slated for definite privatization by the BJP dropped by 3.5 percent relative to private firms. Surprisingly, government-controlled companies that were only under study for possible privatization fell by 7.5 percent relative to private firms. We interpret this as evidence of investor belief of policy irreversibility, where reforms may reach a stage beyond which future regimes have difficulty reversing those policies. Further analysis suggests that layoffs, combined with the privatization announcement, served as a credible commitment to the government's privatization agenda.
Keywords: Privatization; Policy Reversal; Political Economy; India
JEL Codes: G15; G38; H11; L33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected defeat of BJP (P27) | drop in stock prices of government-controlled companies (G38) |
| drop in stock prices of government-controlled companies (G38) | decline in stock prices of companies under study for privatization (G34) |
| layoffs associated with privatization announcements (J63) | investor confidence in privatization (L33) |
| divested firms without layoffs (J63) | returns comparable to firms under study (C52) |