Intra-industry effects of privatization announcements : evidence from developed and developing countries

We examine the stock price reaction of rival firms to privatization announcements to infer information about industry effects of privatization. We find that the rival firms reacted negatively to privatization announcements, thus suggesting that the announcement effects reflect competitive considerations rather than positive industry-wide effects. In comparison, we find that the adverse reaction of the rival firms to privatization announcements in developing countries is stronger than that in the developed countries. Interestingly also, we find that full privatization announcements generate larger negative abnormal returns for rival firms than partial privatization announcements where the firm gains only partial autonomy from the government. We present some, albeit weak evidence that the rival firms' reaction to privatization announcement is increasing in the degree of government ownership of the privatized firm. Thus as the proportion of government ownership reduces, subsequent partial privatization elicits stronger market reaction from rival firms. We further demonstrate that the negative abnormal returns earned by shareholders of the rival firms' are not due to price pressure effects.