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The Decision to Privatize: Finance and Politics

  1. I. SERDAR DINC,
  2. NANDINI GUPTA*

Article first published online: 6 JAN 2011

DOI: 10.1111/j.1540-6261.2010.01631.x

Issue

The Journal of Finance

The Journal of Finance

Volume 66, Issue 1, pages 241–269, February 2011

Additional Information

How to Cite

DINC, I. S. and GUPTA, N. (2011), The Decision to Privatize: Finance and Politics. The Journal of Finance, 66: 241–269. doi: 10.1111/j.1540-6261.2010.01631.x

Author Information

* I. Serdar Dinc is at the Sloan School, Massachusetts Institute of Technology and Nandini Gupta is at the Kelley School of Business, Indiana University. We are grateful to Sugato Bhattacharyya, Benjamin Esty, Ray Fisman, Rick Harbaugh, Bill Megginson, Atif Mian, Paola Sapienza, Antoinette Schoar, Anjan Thakor, Gregory Udell, and Kent Womack for valuable comments. We gratefully acknowledge research assistance from Manvi Goel and Ajay Vutha. This paper has also benefited from the comments of participants at the NBER Summer Institute Corporate Finance meeting, the NBER India Conference, Paris Spring Corporate Finance Conference, India's Financial Systems Conference at the Wharton School, the Western Finance Association Meetings, the World Congress of the Econometric Society, and from the comments of workshop participants at the University of Amsterdam, Indiana University, University of Maryland, University of Michigan, MIT, Northwestern University, University of Oregon, Southern Methodist University, Tilburg University, The World Bank, University of Wisconsin, and York University. All remaining errors are our own.

Publication History

  1. Issue published online: 6 JAN 2011
  2. Article first published online: 6 JAN 2011

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ABSTRACT

We investigate the influence of political and financial factors on the decision to privatize government-owned firms. The results show that profitable firms and firms with a lower wage bill are likely to be privatized early. We find that the government delays privatization in regions where the governing party faces more competition from opposition parties. The results also suggest that political patronage is important as no firm located in the home state of the minister in charge is ever privatized. Using political variables as an instrument for the privatization decision, we find that privatization has a positive impact on firm performance.

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