From Commanding Heights to Family Silver: The Halting Progress of Privatization in India (2009) in Privatization Barometer Report 2009.
Papers with Abstracts
Gupta, Nandini (2005), Partial Privatization and Firm Performance, The Journal of Finance, Vol. LX, No. 2, 987-1015.
Most privatization programs begin with a period of partial privatization in which
only non-controlling shares of firms are sold on the stock market. Since management
control is not transferred to private owners it is widely contended that partial privatization
has little impact. This perspective ignores the role that the stock market can
play in monitoring and rewarding managerial performance even when the government
remains the controlling owner. Using data on Indian state-owned enterprises
we find that partial privatization has a positive impact on profitability, productivity,
Chakraborty, Archishman, Nandini Gupta, and Rick Harbaugh (2006), Best Foot Forward or Best for Last in a Sequential Auction? RAND Journal of Economics, Volume 37-1, pages 176-194.
Should a seller with private information sell the best or worst goods first? Considering the
sequential auction of two stochastically equivalent goods, we find that the seller has an incentive to
impress buyers by selling the better good first because the seller’s sequencing strategy endogenously
generates correlation in the values of the goods across periods. When this impression effect is strong
enough, selling the better good first is the unique pure-strategy equilibrium. By credibly revealing
to all buyers the seller’s ranking of the goods, an equilibrium strategy of sequencing the goods
reduces buyer information rents and increases expected revenues in accordance with the linkage
Gupta, Nandini, John Ham, and Jan Svejnar (2008), Priorities and Sequencing in Privatization: Theory and Evidence from the Czech Republic,The European Economic Review, Volume 52, Issue 2, pages 183-208.
While privatization of state-owned enterprises has been one of the most important aspects of the
economic transition from a centrally planned to a market system, no transition economy has
privatized all its firms simultaneously. This raises the question of whether governments privatize
firms strategically. In this paper we examine the determinants of the sequencing of privatization. To
obtain testable predictions about the factors that may affect sequencing, we investigate the following
competing government objectives: (i) Maximizing efficiency through resource allocation; (ii)
maximizing public goodwill from the free transfers of shares to the public; (iii) minimizing political
costs; (iv) maximizing efficiency through information gains; and (v) maximizing privatization
revenues. Next, we use firm-level data from the Czech Republic to test the competing predictions
about the sequencing of privatization. Consistent with the hypotheses of a government priority on
revenues and public goodwill, we find strong evidence that more profitable firms were privatized first.
The sequencing of privatization is also consistent with maximizing efficiency through information
gains. Our results indicate that many empirical studies of the effects of privatization on firm
performance suffer from a selection bias.
Chari, Anusha and Nandini Gupta (2008),
Incumbents and Protectionism: The Political Economy of Foreign Entry Liberalization, Journal of Financial Economics, Volume 88, pages 633-656.
This paper investigates the influence of incumbent firms on the decision to allow foreign direct investment into an industry. Using data from India’s economic reforms, the results show that firms in concentrated industries are more successful at preventing foreign entry, state-owned firms are more successful at stopping foreign entry than privately-owned firms, and profitable state-owned firms are more successful at stopping foreign entry than unprofitable state-owned firms. The pattern of foreign entry liberalization supports the private interest view of policy implementation and suggests that it may be necessary to reduce the influence of state-owned firms to optimally enact reforms.
Gupta, Nandini and Kathy Yuan (2009), On the Growth Effect of Stock Market Liberalizations, Review of Financial Studies, Volume 22(11), pages 4715-4752.
We investigate the e®ect of a stock market liberalization on industry growth in
emerging markets. Consistent with the view that liberalization reduces financing
constraints, we find that industries that are more externally dependent and face
better growth opportunities grow faster following liberalization. However, this
growth increase appears to come from an expansion in the size of existing firms
rather than through the entry of financially constrained new firms. We show that
following liberalization new firm growth occurs in countries and industries with
lower entry barriers. Hence, liberalization has a more uniform growth impact if
accompanied by competition-enhancing reforms.
Dinc, Serdar and Nandini Gupta,
The Decision to Privatize: Finance, Politics and Patronage, The Journal of Finance, Volume LXVI, Number 1, February 2011, pages 241-270.
We investigate the influence of financial and political factors on the decision to privatize government-owned firms using firm-level data from India. The results suggest that larger firms and firms with lower wage expenses are more likely to be privatized early. Based on data at the electoral district level from all elections held since the start of the privatization program, we find that the government delays the privatization of firms located in constituencies where the governing party faces more competition from opposition parties. This result is robust to constituency-level differences in income, literacy, urbanization, and growth opportunities, and to industry and time effects. As an indication that political patronage is important, no government-owned firm located in the home state of the politician in charge of that firm is ever privatized. Using political variables as an instrument for the endogenous privatization decision, we find that privatization has a positive and significant impact on firm performance. (Slides)
Gormley, Todd, Nandini Gupta, and Anand Jha, Quiet life no more? Corporate bankruptcy and bank competition
Bankruptcy procedures around the world involve long delays that
erode firm value and raise the cost of capital (Djankov, et al., 2008).
These inefficiencies are likely to be greater in an uncompetitive
banking sector, where creditors lack the incentive to undertake the
costly effort required to recover assets from delinquent borrowers.
Using a unique dataset on the population of corporate bankruptcy
filings in India, we analyze whether entry deregulation in the
banking sector affects creditors’ incentives to pursue delinquent
firms. Exploiting district-level variation in the entry of new private
banks, we find that bank entry is associated with an increase in
filings by firms seeking a stay on assets to escape increased
repayment pressure from creditors. This increase in filings is more
pronounced in regions with stronger creditor rights. Bank entry is
also associated with a significant decline in the duration of
bankruptcy proceedings and a shift towards workouts rather than
liquidations. The results are consistent with creditors exerting
greater effort to pursue delinquent firms and to resolve bankruptcies
more quickly following deregulation.
Borisov, Alex, Eitan Goldman, and Nandini Gupta,
The Corporate Value of (Corrupt) Lobbying,
Using an event study, we examine whether the stock market considers corporate lobbying to be a value-enhancing investment. On January 3, 2006, lobbyist Jack Abramoff pleaded guilty to bribing politicians, which generated intense scrutiny of lobbyists, limiting their political influence. Using this event as a negative exogenous shock to the ability of firms to lobby, we show that a firm that spends $100,000 more cumulatively on lobbying in the three years prior to 2006, experiences a loss of about $1.3 million in value around the guilty plea. We also find suggestive evidence that part of the value from lobbying arises from potentially unethical practices.
Gupta, Nandini Selling the Family Silver to Pay the Grocer's Bill? The Case of Privatization in India.
Using data on Indian government-owned firms, we investigate the effect of privatization on the performance of these firms. Our results suggest that privatization is positively associated with the profitability and efficiency of of government-owned firms. Despite the small number of transactions, selling majority equity stakes to private owners has an economically significant impact on firm performance. Moreover, privatization is not associated with layoffs or a decline in employee compensation. These results are robust to controlling for the observable and unobservable characteristics of firms selected for privatization, and industry and country level reforms. (Slides)
Gupta, Nandini and Xiaoyun Yu, Does Money Follow the Flag?
We examine whether bilateral political relations can explain investment and trade flows between the United States and other countries. We treat political relations as endogenous using instrumental variable analysis and investigate whether an exogenous shock to political relations, the 2003 war in Iraq, leads to a shift in economic flows. The results suggest that a deterioration in bilateral relations is followed by a significant decrease in economic flows between the United States and
that country. These results are robust to country fixed effects, income, industry growth, financial market development, and risk. (Slides)
Durnev, Art, Larry Fauver, and Nandini Gupta, When Talk Isn’t Cheap: The Corporate Value of Political Rhetoric.
Does political rhetoric matter for firms and investors? We conduct a textual analysis of all 388 gubernatorial “State of the state” speeches given between 2002 and 2010 across U.S. states, to examine this question. The speech may reduce policy uncertainty (eg. Pastor and Veronesi, 2012), reflect the politician’s views regarding the economic future of the state, and contain new information regarding future policies that affect the business environment. Using data on 5,721 firms matched based on their location of their headquarters and main operations, we undertake an event study examining the market reaction to the tone of the State of the state addresses, and also changes in their investment and employment decisions. Controlling for speech length, news leakage, firm, and state-level characteristics, the results show a statistically significant and positive association between the level of optimism expressed in a Governor’s speech, and the abnormal returns of firms headquartered in that Governor’s state. We also find that a more optimistic gubernatorial speech is associated with a statistically significant increase in investment and employment, relative to firm size, whereas a more pessimistic speech is associated with a decline in investment and employment for firms located in that state. To establish identification, we show that the results are robust to identifying the geographic focus of firms’ operations, using a matched sample of firms located in neighboring states as a control group, and instrumental variables. To identify channels by which the content of the speech may have an impact, we show that firms that obtain state-government contracts, and those that are more dependent on skilled human capital and therefore education spending, significantly increase investments if the budget-related and education-related parts of the speech are more optimistic. We also find that political rhetoric is most informative during uncertain economic conditions, when government policy has had a greater impact. Lastly, we show that institutional characteristics, such as term limits and state-level transparency, affect the response of firms to the speech.(Slides)
Borisov, Alex, Nandini Gupta, and Krishnamurthy Subramanian, Employment Protection Laws and Cross Border Mergers and Acquisitions. (Preliminary)
Failure to realize the value of mergers and acquisitions is often blamed on the exit of productive employees, who face increased employment risk from a new owner. Legal protection
against dismissal may increase the value of mergers and acquisitions by reducing job-related uncertainty. However, stricter dismissal laws may also raise the cost of hiring and firing workers, potentially discouraging M&A deals. We exploit within-country variation provided by
changes in employment protection laws in OECD countries to examine the effect of stronger
dismissal laws on M&A activity by U.S. firms in these countries. Consistent with the view
that dismissal laws may increase the value of M&As, we find that target countries that
strengthen dismissal laws experience an increase in both the value and number of deals by
U.S. firms in those countries. Examining disaggregated M&A flows at the industry level
reveals more nuanced effects. Strengthening labor laws is associated with a channeling of
cross-border M&A activity into industries: (i) that are more capital-intensive; (ii) where
labor is more productive; (iii) where intangible assets dominate more; and (iv) where job
turnover is lower. The results are robust to treating employment protection laws as endogenous in an instrumental variable framework, and controlling for industry and country-level factors.
Cella, Cristina, Andrew Ellul, and Nandini Gupta, Learning through a Smokescreen: CEO Compensation over Tenure. (Coming soon).
In this paper we investigate the dynamics of executive compensation over the tenure of the CEO in a firm, where shareholders learn about a CEO’s ability and the quality of the CEO-firm job match in the presence of reporting distortions. Career concerns are very high in the early years of tenure because of incomplete information and shareholders update their beliefs using current firm performance which, as suggested by Fudenberg and Tirole (1995), may be distorted by CEOs to maximize the expected length of their tenure. We consider the dynamics of CEO compensation using 1,624 completed tenure spells in 1,023 firms from 1992 to 2009 and use Altonji and Shakotko’s (1987) methodology to account for job match and firm effects. While earnings management is found to influence compensation, this effect diminishes over the CEO’s tenure. CEOs that decrease earnings management the most experience the highest increase in compensation. We show that the effect of career concerns varies based on CEO and firm characteristics. Consistent with the theory, earnings management is observed to have a stronger influence on compensation for CEOs without a fixed term employment contract, younger CEOs, firms in more competitive industries, and with fewer institutional investors. These results suggest that both managers and firms learn about CEO ability and the quality of the job match over the tenure of the CEO, and that this learning process is affected by the career concerns of CEOs.