| Abstract: |
On November 8, 2016, the Indian government made a surprise announcement that
certain currency notes (representing 86% of the currency then in circulation)
would no longer be legal tender (although they could be deposited in banks
over a limited period). The stated reason for this sudden “demonetization” was
to combat tax evasion and corruption associated with “unaccounted-for” cash.
We compute abnormal returns for firms on the Indian stock market around this
event, and compare patterns of abnormal returns for different subsamples of
firms defined by industry, ownership structure, and other characteristics.
There is little evidence that sectors thought to be associated with greater
tax evasion or corruption experienced significantly different returns.
However, we find substantial positive returns for banks and for state owned
enterprises (SOEs), implying market expectations that are puzzling in some
respects, especially as the initial reactions do not show any evidence of
reversal in the five months following the event. The bank results appear to
indicate a market expectation of a persistent increase in financial depth. We
also find a pattern of higher returns for industries that are characterized by
a greater dependence on external finance, possibly suggesting an expectation
of an easing of financial constraints. The returns for SOEs may be due to
possible indirect effects of the announcement on perceptions of future
corruption among these firms. |