The Effect of Liberalization of Foreign Direct Investment (FDI) Limits on Domestic Stocks: Evidence from the Indian Banking Sector

29 Pages Posted: 15 May 2004

See all articles by Chinmoy Ghosh

Chinmoy Ghosh

University of Connecticut - Department of Finance

Phani BV

Indian Institute of Technology Kanpur

Abstract

Foreign Direct investment (FDI) limits were liberalized in India to allow greater than fifty-one percent ownership of private sector banks in February, 2002. Portfolios of private sector and government owned banks posted significant and large value gains surrounding the announcement, the gains by private sector banks being almost double that by government banks. The analysis shows that the price increase is higher for smaller banks that have less debt, are less efficient, less productive, and burdened with non-performing assets. We conclude the evidence is consistent with the hypothesis that the valuation gains reflect the vulnerability to and premium of potential takeover of the inefficient banks following the liberalization.

Keywords: Banking, FDI, Foreign Direct Investment, stock prices, event study, performance

Suggested Citation

Ghosh, Chinmoy and Bollempalli, Venkata Phani, The Effect of Liberalization of Foreign Direct Investment (FDI) Limits on Domestic Stocks: Evidence from the Indian Banking Sector. Available at SSRN: https://ssrn.com/abstract=546422 or http://dx.doi.org/10.2139/ssrn.546422

Chinmoy Ghosh (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3040 (Phone)
860-486-0349 (Fax)

Venkata Phani Bollempalli

Indian Institute of Technology Kanpur ( email )

IME, IIT Kanpur
Kanpur, Uttar Pradesh 208016
India
+91-512-2597877 (Phone)
+91-512-2597553 (Fax)

HOME PAGE: http://iitk.ac.in/new/b-v-phani

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