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Partial privatization and bank performance: evidence from India

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Author Info

  • Subrata Sarkar
  • Rudra Sensarma

Abstract

Purpose – The purpose of this paper is to examine the impact of partial privatization on performance of state-owned banks using data from the Indian banking industry during the period 1986-2003, and test the hypothesis that privatization leads to improvement in performance even when the government retains controlling stakes. Design/methodology/approach – Employing the technique of stochastic frontier analysis, bank-specific estimates of total factor productivity were obtained, because they can be considered as a measure of performance, along with four accounting measures. Panel regression models were employed to assess the impact of partial privatization on these performance indicators. Findings – Partial privatization was found to result in significant improvement in performance of state-owned banks. This finding is robust to alternative model specifications and different techniques for controlling potential selection bias. Research limitations/implications – The paper focuses on the impact of partial privatization on operational and financial performance of banks. Future work could consider the effects on other aspects such as wages and financial development. Practical implications – The results suggest that faced with political opposition to full privatization, even if the government does not relinquish control, the exposure to market discipline through partial privatization may be an effective way of improving performance of state-owned banks. Originality/value – This is the first work to examine the effects of partial privatization in the context of Indian banks and one of the very few to study this issue for any banking industry.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 4 (December)
Pages: 276-306

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Handle: RePEc:eme:jfeppp:v:2:y:2010:i:4:p:276-306

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Related research

Keywords: Banks; India; Organizational performance; Privatization; Stochastic processes;

References

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  1. Beck, Thorsten & Cull, Robert & Jerome, Afeikhena, 2005. "Bank privatization and performance - emprical evidence from Nigeria," Policy Research Working Paper Series 3511, The World Bank.
  2. Sarkar, Jayati & Sarkar, Subrata & Bhaumik, Sumon K., 1998. "Does Ownership Always Matter?--Evidence from the Indian Banking Industry," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 262-281, June.
  3. Rafael La Porta & Florencio López-De-Silanes, 1999. "The Benefits Of Privatization: Evidence From Mexico," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1193-1242, November.
  4. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
  5. Sumon Kumar Bhaumik & Ralitza Dimova, 2003. "How Important is Ownership in a Market with Level Playing Field? The Indian Banking Sector Revisited," William Davidson Institute Working Papers Series 2003-569, William Davidson Institute at the University of Michigan.
  6. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June.
  7. Nakane, Marcio I. & Weintraub, Daniela B., 2005. "Bank privatization and productivity: Evidence for Brazil," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2259-2289, August.
  8. Boardman, Anthony E & Vining, Aidan R, 1989. "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises," Journal of Law and Economics, University of Chicago Press, vol. 32(1), pages 1-33, April.
  9. Chen, Zhian & Li, Donghui & Moshirian, Fariborz, 2005. "China's financial services industry: The intra-industry effects of privatization of the Bank of China Hong Kong," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2291-2324, August.
  10. Sensarma, Rudra, 2006. "Are foreign banks always the best? Comparison of state-owned, private and foreign banks in India," Economic Modelling, Elsevier, vol. 23(4), pages 717-735, July.
  11. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, vol. 65(3), pages 367-83, June.
  12. Vining, Aidan R & Boardman, Anthony E, 1992. " Ownership versus Competition: Efficiency in Public Enterprise," Public Choice, Springer, vol. 73(2), pages 205-39, March.
  13. Nakane, Marcio I. & Weintraub, Daniela B., 2005. "Bank privatization and productivity : evidence for Brazil," Policy Research Working Paper Series 3666, The World Bank.
  14. Berg, Sigbjorn Atle & Forsund, Finn R. & Hjalmarsson, Lennart & Suominen, Matti, 1993. "Banking efficiency in the Nordic countries," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 371-388, April.
  15. Nandini Gupta, 2005. "Partial Privatization and Firm Performance," Journal of Finance, American Finance Association, vol. 60(2), pages 987-1015, 04.
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