Testing Limits to Policy Reversal: Evidence from Indian Privatizations

We examine the e¤ect of regime change on privatization using the 2004 election surprise in India. In that election, the pro-reform BJP was unexpectedly defeated by a less reformist coalition. Stock prices of government-controlled companies that had been slated for de\u85nite pri-vatization by the BJP dropped by approximately 3.5 percent relative to private rms. Surprisingly, government-controlled companies that were only under study for possible privatization fell by 7.5 percent relative to private rms. We interpret this as evidence consistent with investor belief of policy irreversibility, where reforms may reach a point of no returnbe-yond which future regimes have di ¢ culty reversing those policies. Further analysis suggests that layo¤s, combined with the privatization announce-ment, served as a credible commitment to the governments privatization agenda. (JEL:Fill in) Over the past couple of decades, economists have shifted towards supporting private over public ownership, motivated by a large body of the theoretical and empirical work documenting the ine ¢ ciencies stemming from state ownership (see Shleifer, 1998, for a summary). Concomitant with this change in thinking, governments around the world have privatized state assets to raise revenues, and also presumably to generate improved economic performance (Megginson We are grateful to Abhijit Banerjee, Nandini Gupta, and Enrico Perotti for helpful discus-sions, and many seminar participants for useful input. We thank Benjamin Schneer and Rina Lieberman for their valuable assistance, and gratefully acknowledge the Chazen Institute a