Testing Limits to Policy Reversal: Evidence from Indian Privatizations

47 Pages Posted: 24 Sep 2007 Last revised: 10 Sep 2010

See all articles by Siddhartha Dastidar

Siddhartha Dastidar

Columbia University

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Tarun Khanna

Harvard University - Strategy Unit

Date Written: September 2007

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.

Suggested Citation

Dastidar, Siddhartha and Fisman, Raymond and Khanna, Tarun, Testing Limits to Policy Reversal: Evidence from Indian Privatizations (September 2007). NBER Working Paper No. w13427, Available at SSRN: https://ssrn.com/abstract=1016339

Siddhartha Dastidar

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Raymond Fisman (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Tarun Khanna

Harvard University - Strategy Unit ( email )

Harvard Business School
Boston, MA 02163
United States
617-495-6038 (Phone)
617-495-0355 (Fax)

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