Intra-Industry Effects of Bank Privatization: A Clinical Analysis of the Privatization of the Commonwealth Bank of Australia

Posted: 6 Jun 2003

See all articles by Isaac K. Otchere

Isaac K. Otchere

Carleton University - Sprott School of Business

Janus Chan

University of Melbourne - Melbourne Business School

Abstract

This paper provides a comprehensive analysis of the effects of the privatization of the Commonwealth Bank of Australia (CBA) on the Bank's performance and that of the rival banks. First, we find that the major rival banks reacted negatively to the privatization announcements although the initial (partial privatization) and the final (full) privatization announcements elicited stronger stock market reaction from the rival banks. Second, we find that the CBA's long-term stock market performance improved markedly as the proportion of government ownership decreased, with the Bank's cumulative abnormal returns being 50% more than those of its rivals three years after the Bank had been fully privatized. Also, the CBA has not only been very efficient in reducing cost and improving its profitability in the post-privatiztion period, it has outperformed its rivals on almost all the operating performance measures and has become the most profitable bank in Australia. A particularly noteworthy finding is that the improvement in the CBA's operating and stock market performance and the rival banks' reaction to the partial and full privatization announcements were strongest after the Bank had been fully privatized. The implication of the results for governments contemplating privatization of state-owned enterprises is that full privatization is necessary in order to achieve strong gains in efficiency, profitability and stock market performance.

Keywords: Bank, Privatization, Rivals' reaction, CAMEL, operating performance

JEL Classification: G21, G32, G14

Suggested Citation

Otchere, Isaac K. and Chan, Janus, Intra-Industry Effects of Bank Privatization: A Clinical Analysis of the Privatization of the Commonwealth Bank of Australia. Available at SSRN: https://ssrn.com/abstract=405200

Isaac K. Otchere (Contact Author)

Carleton University - Sprott School of Business ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S SB6
Canada
(613) 520-2600 ext 2731 (Phone)
(613) 520-4427 (Fax)

Janus Chan

University of Melbourne - Melbourne Business School

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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