Effect of Liberalization of Foreign Investment Limits: Evidence from the Indian Banking Sector
35 Pages Posted: 2 Aug 2006
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: Suggested Citation
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