Effect of Liberalization of Foreign Investment Limits: Evidence from the Indian Banking Sector

35 Pages Posted: 2 Aug 2006

See all articles by Chinmoy Ghosh

Chinmoy Ghosh

University of Connecticut - Department of Finance

Phani BV

Indian Institute of Technology Kanpur

John P. Harding

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies

Date Written: July 27, 2006

Abstract

On February 16, 2002, the Reserve Bank of India issued a circular that signaled a policy liberalization facilitating acquisition of private sector banks in India by foreign entities. Portfolios of private sector and nationalized banks posted significant value gains in the days surrounding the announcement. The gains by private sector banks were almost double those of nationalized banks. We further analyze the firm specific abnormal returns using cross-sectional regressions and find a significant relation between firm-specific abnormal returns and factors typically associated with a bank's potential for takeover. These results provide the first empirical support for Stulz's hypothesis that one cause of the valuation gains associated with liberalization is the expected gain from a reduction of agency costs.

Keywords: Stock market liberalization, Foreign direct investment (FDI), Agency cost, Corporate governance, Takeovers

JEL Classification: G15, G21, G34

Suggested Citation

Ghosh, Chinmoy and Bollempalli, Venkata Phani and Harding, John P., Effect of Liberalization of Foreign Investment Limits: Evidence from the Indian Banking Sector (July 27, 2006). Available at SSRN: https://ssrn.com/abstract=921672 or http://dx.doi.org/10.2139/ssrn.921672

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

John P. Harding

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies ( email )

2100 Hillside Road
Unit 1041RE
Storrs, CT 06269-2041
United States
860-486-3227 (Phone)
860-486-0349 (Fax)

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