Privatization and Competition: Industry Effects of the Sale of British Airways and Air Canada
Posted: 13 Sep 1999 Last revised: 7 Mar 2013
Date Written: July 31, 1994
Previous studies evaluating the effect of privatization have relied on accounting data. While this approach has provided significant results, the accounting data are vulnerable to manipulation especially by the new management. In this paper, we examine the effect of privatization on i) the product prices in the markets where the privatized firms provided service, and the effect on ii) the stock prices of competing firms. We believe that the product prices and stock prices will present a truer picture of privatization. For our analysis, we choose the privatization of British Airways and Air Canada. We find that i) airfares in both the British Airways and Air Canada markets fell significantly when the control passed from government to private ownership - reflecting (expected) improvements in economic efficiency and keener competition. Simultaneously, we also find that ii) stock prices of competitors (the US airlines) fell significantly upon announcement. The abnormal stock returns to the privatized airlines' competitors are related to their exposure in the markets served British Airways and Air Canada. The results imply that change to private ownership improves economic efficiency; and privatization benefits consumers through lower prices.
JEL Classification: L33, G3, L93
Suggested Citation: Suggested Citation