Testing limits to policy reversal: Evidence from Indian privatizations

We examine the effect of regime change on privatization. In the 2004 Indian election, the pro-reform BJP was unexpectedly defeated by a less reformist coalition. Stock prices of government-controlled companies that had been slated for privatization by the BJP dropped 3.5% relative to private firms. Government-controlled companies that were under study for possible privatization fell 7.5% relative to private firms. This is consistent with investor belief of a “point of no return,” where advanced reforms are more difficult to reverse. Further analysis suggests that layoffs, combined with the privatization announcement, served as a credible commitment to privatize.