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Does liberalization reduce agency costs? Evidence from the Indian banking sector

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  • Ghosh, Chinmoy
  • Harding, John
  • Phani, B.V.

Abstract

On February 16, 2002, the Reserve Bank of India issued a circular that signaled a policy liberalization facilitating acquisition of private sector banks in India by foreign entities. Portfolios of private sector and nationalized banks posted significant value gains in the days surrounding the announcement. The gains by private sector banks were almost double those of nationalized banks. We further analyze the firm specific abnormal returns using cross-sectional regressions and find a significant relation between firm-specific abnormal returns and factors typically associated with a bank's potential for takeover. These results provide the first empirical support for Stulz's hypothesis that one cause of the valuation gains associated with liberalization is the expected gain from a reduction of agency costs.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 3 (March)
Pages: 405-419

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:3:p:405-419

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Cited by:
  1. Kaya, Ilker & Lyubimov, Konstantin & Miletkov, Mihail, 2012. "To liberalize or not to liberalize: Political and economic determinants of financial liberalization," Emerging Markets Review, Elsevier, vol. 13(1), pages 78-99.
  2. Shahid Ebrahim, M. & Hussain, Sikandar, 2010. "Financial development and asset valuation: The special case of real estate," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 150-162, January.

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