Stock Market Reactions to India's 2016 Demonetization

50 Pages Posted: 9 Jun 2017 Last revised: 10 Sep 2018

See all articles by Dhammika Dharmapala

Dhammika Dharmapala

University of Chicago Law School

Vikramaditya S. Khanna

University of Michigan Law School; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2018


On November 8, 2016, the Indian government made a surprise announcement that certain currency notes (representing 86% of the currency then in circulation) would no longer be legal tender (although they could be deposited in banks over a limited period). The stated reason for this sudden “demonetization” was to combat tax evasion and corruption associated with “unaccounted-for” cash. We compute abnormal returns for different subsamples of firms - defined by industry, ownership structure, and other characteristics - on the Indian stock market around this event. There is little evidence that sectors thought to be associated with greater tax evasion or corruption experienced significantly different returns. However, we find substantial positive returns for banks and for state owned enterprises (SOEs). These effects persist over longer time horizons, implying that the initial reactions do not show any indication of subsequent reversal. The bank results appear to indicate a market expectation of a persistent increase in financial depth. We also find a pattern of higher returns for industries that are characterized by a greater dependence on external finance, possibly suggesting an expectation of an easing of financial constraints. The returns for SOEs are more puzzling and we canvass a number of potential explanations, while leaving further examination of this finding to future research.

Keywords: Demonetization; Informal economy; Tax evasion; Corruption; Financial constraints

JEL Classification: E42; H26; D73; G20

Suggested Citation

Dharmapala, Dhammika and Khanna, Vikramaditya S., Stock Market Reactions to India's 2016 Demonetization (July 2018). U of Michigan Law & Econ Research Paper No. 17-010, University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 830, Available at SSRN: or

Dhammika Dharmapala (Contact Author)

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Vikramaditya S. Khanna

University of Michigan Law School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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