Testing limits to policy reversal: Evidence from Indian privatizations

Siddhartha G. Dastidar , Raymond Fisman and Tarun Khanna
Journal of Financial Economics 89 (2008) 513–526

The big question???
• Democracy is an awful way to run a country, but it's the best system we have.
• Winston Churchill

• The political economy – Only politics and no economy? • Does the change in regime cause a reversal of policy decisions made by the earlier Government?

The small question • A prince never lacks legitimate reasons to break his promise. • Niccolo Machiavelli • Analysis of regime changes and its impact on privatization in India .

The story…. • Gap between planned and actual privatizations • One explanation being volatile politics .

Why privatization in case of a regime shift Might succeed • Difficult to reverse the juggernaut because of – Inertia in policy – Vested interests can be mobilized to resist change • Alteration of cost benefit for future governments • Politicians want some ‘credibility’ (incredulous!) – The know they will not be in power forever (and we thought politicians can’t think) • Want to maintain reputation of legislature (now you gotta be kidding me…) Might not succeed • We are not bound by what they did • Investors would believe this and therefore try to solve it • The solution would undermine the selloff in the first place .

The two questions • How credible do investors consider the privatization commitments made by the Government? • To what extent do Governments take actions to reinforce investors’ beliefs that privatizations will be carried out even in the face of regime shifts to less privatizationfriendly governments? .

The idea The privatization programs Change in regime .

The event • The 2004 general elections .

Expectation .

Result .

. – DIVEST (the company was slated for future disinvestment at the time of the election). – NEVER (the company was not under consideration for further disinvestment).Data classification • A list from the Ministry of Disinvestment (which has since been abolished) • Companies classified as: – COMPLETE (government had relinquished control by the time of the election and held a stake below 26%). – UNDERSTUDY (the company was being studied by the government for possible future disinvestment).

Beginnings of the experimental design • 2 shocks – May 14-17 – Extreme shift – May 14-19 – Moderate shift • The longer window is used for the study while the smaller window for robustness checks .

and – (c) company-level controls. • Information on political alliances is derived from (www.gov. – (b) privatization information companies. .indianelections.eci. for the government-controlled • BSE 500 is the sample set • Ownership data and data on firm characteristics were taken from CMIE • Labour force data was collected from the firms’ annual reports • Data on Indian elections and political parties running various state governments – Election Commission of India website (www.com.in).Data • The data required for the empirical tests are:– (a) stock prices.

Variables • Main dependent variable: • Returns • Main dependent variable • Returns • Other dependent variables – – – – Size – sales of the firm Wage rate Debt\Equity PBIT\NA .

Unit of observation FIRM .

The cute senior regression model .

The cute junior regression model .

If I was God!!! .

For this experiment I would… • Let the BJP Government continue with the program • Reverse the BJP and Congress regimes • What if the companies were not Government companies? .

Why I liked the paper? Duh!!! I understood something .

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