Does privatization of public sector banks affect stock prices? An event study approach on the Indian banking sector stocks

Abstract

PurposeWith a sample of 22 banks, this study examines the significance of the news contents about the privatization of two public sector banks in India. New information does impact the stock markets. This study provides evidence on how the privatization of public sector banks impacted the returns of the Indian banking sector.Design/methodology/approachThis study employs the standard event study methodology with the market model for estimating the normal returns.FindingsThe statistical results indicate that while the private sector banks experienced positive average abnormal returns on the event day, the cumulative effect of the announcement is negatively significant for both private and public sector banks. The statistical results also provide evidence of information leakage, with significant results before the announcement date. The shorter event windows analysis exhibits significant positive returns in the 5-days [−2, +2] window for the private sector banks and the entire sample, signifying a positive short-term impact on the private sector banks.Originality/valueThe event study literature captures the impacts of many events. However, to the best of our knowledge, the impacts of the privatization of the Indian public sector banks have never been examined using the event study methodology. Hence, this study anticipates being the first-ever study to fill this gap and extend the available literature in finance. In addition, although we provide Indian evidence, future studies may be oriented to capture cross-country impacts.

Impact of Hindenburg Research Report on the Stock Prices of Adani Group Companies: An Event Study

“…They employed event study methodologies and regression analyses and discovered that insider trading was a significant factor in stock price movements in India’s emerging market. Rai and Pandey (2022) examined the effect of privatising two public sector banks in India on the stock market performance of 22 banks. By employing event study methodology and market model, the researchers discovered that private sector banks had favourable average abnormal returns (AARs) on the day of the event, yet a detrimental overall impact on both private and public sector banks.…”

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“…Overall, price effects following one-day abnormal returns throughout the studied period were inconsistent in terms of strength and direction (momentum or contrarian effect). Rai & Pandey (2021) investigated the significance of news material about the privatisation of two public sector banks in India using a sample of 22 banks. The researchers used a typical event research methodology and the market model to estimate the expected returns.…”

Impacts of bank mergers on shareholder's wealth

“…After the merger, the PNB is now the second-largest PSB; Canara bank has become the fourthlargest; the Union Bank of India (UBI) has become the fifth-largest, and the Indian Bank has become the seventh-largest PSB. However, the Government has decided to privatize the four banks from which two banks have to be privatized by the financial year 2021-22 (Rai & Pandey, 2021).…”

“…In an efficient market, any event affects the stock returns significantly. Many studies have recently been conducted to test the impact of different events on the stock market (Alam et al, 2020;Chhetri & Baral, 2018;He et al, 2020;Pandey & Jaiswal, 2017;Pandey & Kumari, 2020a, 2020b, 2021a, 2021bRai & Pandey, 2021;Ullah et al, 2021). In the same way announcement of a merger directly or indirectly affects the investors.…”