The Decision to Privatize: Finance and Politics
47 Pages Posted: 28 Feb 2005 Last revised: 12 May 2014
Date Written: February 17, 2010
We investigate the influence of political and financial factors on the decision to privatize government-owned firms using firm-level data from India. We find that the government significantly delays privatization in regions where the governing party faces more competition from opposition parties. This result is robust to firm-specific factors and regional characteristics. The results also suggest that political patronage is important as no government-owned firm located in the home state of the minister in charge is ever privatized. Using political variables as an instrument for the endogenous privatization decision, we find that privatization has a positive impact on firm performance.
Keywords: Government Ownership, Political Economy, Emerging Markets, Economic Reform, State-Owned Enterprise, Interest Groups, IPO
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