Does disinvestment affect stock prices? An event study approach on the Indian public sector stocks

The impact of privatization on the performance of firms is widely debated in the economic literature. Under the philosophy of a New Political Economy, structural reforms in the form of liberalization and privatization started in 1991 in the Indian economy. This led to the disinvestment of a large number of central and state public sector enterprises. However, due to limited studies and mixed findings, the effect of disinvestment on the performance of public sector firms is inconclusive in the Indian market. The major aim of the present study is to revisit India’s disinvestment policy and examine the market response to disinvestment events in the utility sector under the improved business environment in the past decade. The study employs an event study technique on a sample of ten leading utility sector firms. The NIFTY-50 and NIFTY-CPSE indices are used to calculate market returns. The results imply that even better institutions fail to moderate partial privatization, and successive partial privatization is insufficient to bring efficiency and change management practices. It is because successive disinvestment keeps the fundamental ownership and management ethos the same. The findings warrant regulators addressing firm moderating factors in “window dressing” before going public for better privatization outcomes.