Privatization and Competition: Industry Effects of the Sale of British Airways and Air Canada

Posted: 13 Sep 1999 Last revised: 7 Mar 2013

See all articles by Catherine C. Eckel

Catherine C. Eckel

Texas A&M University

Vijay Singal

Virginia Tech

Doug Eckel

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: July 31, 1994

Abstract

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

Eckel, Catherine C. and Singal, Vijay and Eckel, Douglas W., Privatization and Competition: Industry Effects of the Sale of British Airways and Air Canada (July 31, 1994). Journal of Financial Economics (JFE), Vol. 43, No. 2, 1997. Available at SSRN: https://ssrn.com/abstract=5534

Catherine C. Eckel

Texas A&M University ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

Vijay Singal (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States
5402317750 (Phone)

Douglas W. Eckel

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-4450 (Phone)
540-231-4487 (Fax)

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