NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Testing Limits to Policy Reversal: Evidence from Indian Privatizations

Siddhartha G. Dastidar, Raymond Fisman, Tarun Khanna

NBER Working Paper No. 13427
Issued in September 2007
NBER Program(s):   CF   POL

We examine the effect of regime change on privatization using the 2004 election surprise in India. The pro-reform BJP was unexpectedly defeated by a less reformist coalition. Stock prices of government-controlled companies that had been slated for definite privatization by the BJP dropped by 3.5 percent relative to private firms. Surprisingly, government-controlled companies that were only under study for possible privatization fell by 7.5 percent relative to private firms. We interpret this as evidence of investor belief of policy irreversibility, where reforms may reach a stage beyond which future regimes have difficulty reversing those policies. Further analysis suggests that layoffs, combined with the privatization announcement, served as a credible commitment to the government's privatization agenda.

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Document Object Identifier (DOI): 10.3386/w13427

Published: Dastidar, Siddhartha G. & Fisman, Raymond & Khanna, Tarun, 2008. "Testing limits to policy reversal: Evidence from Indian privatizations," Journal of Financial Economics, Elsevier, vol. 89(3), pages 513-526, September.

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