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, Corporate Bankruptcy and Bank Competition
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
Borisov, Alex, Eitan Goldman, and Nandini Gupta,
The Value of (Corrupt) Lobbying,
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.
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)