Do Privatized Banks in Middle- and Low-Income Countries Perform Better than Rival Banks? An Intra-Industry Analysis of Bank Privatization

This paper presents a comprehensive analysis of the preand post-privatization operating performance and stock market performance of privatized banks and rival banks in middleand low-income countries. First, we find that privatization announcements elicit negative abnormal returns for rival banks and that the effects are more pronounced for subsequent tranche sale where the proportion of government ownership in the privatized bank is reduced. The rival banks’ reaction to privatization announcement is consistent with the predictions of the competitive effect hypothesis. Second, the privatized banks underperformed the benchmark index in the long run. Investors who bought shares of the privatized banks on the first day of trading and held them for 5 years (instead of investing in the market index) lost 25% of their wealth. The underperformance is consistent with the negative long run returns that have been documented for initial public offerings. Third, we do not find any statistically significant improvements in the privatized banks’ post privatization operating performance. On the contrary, we find that the privatized banks carry higher problem loans than their rivals in the post privatization period. In addition, they appear to be overstaffed relative to their rivals. Our cross sectional regression results indicate that the proportion of government ownership significantly explains the underperformance of the privatized banks. The results support the view that continued government ownership of the privatized banks may hinder managers’ ability to restructure the privatized bank.