Does the response of competitors to privatization announcements reflect competitive or industry-wide information effects? International evidence

We examine the stock price reaction of rival firms to the announcement of the privatization of their industry counterparts to infer information about the intra-industry effects of privatization. We find that the rival firms reacted negatively to the privatization announcements, suggesting that the announcement effects reflect competitive rather than positive industry effects. The reaction is stronger for industry counterparts in low economic freedom countries than those in high economic freedom countries. Interestingly, we also find that full privatization announcements generate larger negative abnormal returns for rival firms than partial privatization announcements where the privatized firm gains only partial autonomy from the government. In this regard, we find that, as the proportion of government ownership reduces, subsequent partial privatization announcement elicits stronger market reaction from rival firms. The negative abnormal returns earned by shareholders of rival firms are not due to price pressure and portfolio rebalancing effects resulting from index composition changes. We conclude that the negative effects documented for the rival firms reflect investors' concern about the potential competitive effects resulting from privatization of the state enterprise.