Partial Privatization and Firm Performance: Evidence from India
31 Pages Posted: 21 Dec 2001
Date Written: November 2001
Privatization in India is mostly limited to the diffuse sale of minority stakes in firms. Since control rights have not been transferred to private owners it is widely contended that the process has had little impact on firm behavior. We find however that even the sale of minority stakes has a positive impact on firm performance and productivity. As the government remains the controlling owner in these firms, we infer that the improvement is attributable to the role of the stock market in monitoring managerial performance rather than to a change in owners' objectives. Consistent with this interpretation, we find that improvements in earnings are due to an increase in the productivity of labor rather than layoffs. Partial privatization continues to affect the sales and operating efficiency of firms when we control for competitive conditions, and the evidence also suggests that privatization and competition have a complementary impact on firm performance.
Keywords: Partial privatization; Corporate governance; Manager incentives; India
JEL Classification: L33, L52, G34, M40, M46
Suggested Citation: Suggested Citation