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, and investment.

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 principle.

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.

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.

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.

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)

Bankruptcy procedures around the world involve long delays that erode firm value and raise the cost of capital. These inefficiencies are likely to be greater in an uncompetitive banking sector where creditors leading the “quiet life” lack the incentive to undertake the costly effort required to recover assets from defaulting borrowers in a weak legal system. Using a unique dataset on corporate bankruptcy filings in India, we investigate whether entry deregulation in the banking sector affects creditors’ incentives to pursue delinquent firms. Exploiting district-level variation in bank entry we find that entry by privately-owned banks is associated with an increase in bankruptcy filings by firms seeking a stay on assets to escape increased monitoring by 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 an increase in workouts. The results do not appear to be driven by a change in borrower characteristics, or selective entry decisions. Our findings are consistent with creditors exerting greater effort to pursue delinquent firms and resolve bankruptcies more quickly following an increase in banking sector competition.Keywords: Bankruptcy, Banking competition, Duration

Does the stock market consider lobbying expenditures to be a value-enhancing investment for firms? Is there truth to the popular view that lobbying adds value by facilitating corruption? In 2006, top lobbyist Jack Abramoff pleaded guilty to the bribery of government officials, which generated intense scrutiny of corruption in the lobbying process. Using this event as an exogenous negative shock to the ability of firms to lobby and engage in corruption, we examine the effect of lobbying on firm value. We find that a firm that spends $100,000 more on lobbying experiences an average decrease of $1.4 million in value in a 3-day event window around the guilty plea. Using corporate social responsibility rankings as a proxy for a firm’s propensity to engage in corruption, we find that in response to the guilty plea, firms with a reputation for poor business ethics, experience a greater decrease in value due to their lobbying activities. Lastly, providing another indication that the market values corrupt lobbying practices, we show that anti-corruption legislation passed in the aftermath of the scandal significantly reduces the value of lobbying firms. Our results suggest that lobbying creates value for shareholders of lobbying firms, and that part of this value may be attributed to corruption.

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)

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)