Exogenous Change in Distribution of Voting Rights, Control and Firm Value: The Case of Indian Banks

This paper provides evidence on the value of the vote hypothesis with stock price analysis around liberalization of foreign ownership restrictions in the private Indian banks. In May 2005, the Indian government removed the cap of 10 percent ownership by foreign banks, which had made takeover of Indian banks impossible for foreign banks. We hypothesize that removal of the voting cap would increase the probability of takeover and enhance the value of votes underlying the shares of the banks. The analysis reveals evidence consistent with the hypothesis. This study makes important contributions to the growing literature on the valuation impact and efficiency gains of liberalization of foreign ownership restrictions in emerging markets, as well as the rich literature on corporate governance and control relating to the value of voting privilege in companies with disparate voting rights.