Testing Limits to Policy Reversal: Evidence from Indian Privatizations

Siddhartha G. Dastidar, Raymond Fisman and Tarun Khanna

No 13427, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G15 G38 H11 L33 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-cwa, nep-dev and nep-tra
Note: CF POL
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Published as 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.

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