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Partial Privatization and Firm Performance



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    • Nandini Gupta is from the Kelley School of Business, Indiana University. I am grateful to the Administrative Staff College of India for providing some of the data used in this analysis. This paper has benefited enormously from the comments of the editor, Professor Richard Green, and an anonymous referee. I also gratefully acknowledge the helpful suggestions of Pierre Azoulay, Sugato Bhattacharyya, Serdar Dinc, Bill Megginson Rick Harbaugh, Jan Svejnar; seminar participants at Columbia University, Indiana University, and the University of Michigan; and participants at the 2002 Transition Economics Conference, the 2002 AIB Annual Meeting, the 2002 FEEM Conference on Privatization, Corporate Governance, and Financial Markets, and the 2003 American Economic Association Meetings. All remaining errors are my own.


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.