Researchers from Nagaland University and Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya (PDUAM), Tulungia, have found that banking fraud disclosures trigger negative stock market reactions, with public sector banks experiencing sharper losses than their private sector counterparts.
The study examined four major Indian banking fraud cases to understand how financial misconduct affects share prices, investor confidence and the wider banking sector. It also found that the size and maturity of a bank, its ownership structure and its institutional credibility influence how investors respond to fraud-related disclosures.
The findings were published in the BRICS Journal of Economics, a peer-reviewed, open-access journal published by Lomonosov Moscow State University. The paper was co-authored by Prof. Joy Das of the Department of Commerce at Nagaland University and Dr. Mahesh Dahal, Assistant Professor in the Department of Commerce at PDUAM, Tulungia, Assam.
The researchers said the findings underline the importance of institutional reputation, sound governance and effective risk management in maintaining investor confidence in India’s banking system.
Banks play a central role in economic growth by mobilising financial resources and extending credit to businesses and individuals. However, fraud and unethical practices can undermine confidence in individual institutions and affect perceptions of the wider financial system, even when regulatory safeguards are in place.
The study sought to assess the impact of fraud disclosures on the share prices of banks directly involved, while also examining whether the announcements affected other banking stocks through spillover effects.
Four banking fraud cases examined
The researchers analysed fraud cases involving IDBI Bank, Punjab National Bank (PNB), Bank of India and Canara Bank. Using stock market data from the Bombay Stock Exchange (BSE), they applied event study methodology and regression analysis to assess abnormal stock returns around the disclosure of fraud.
Abnormal returns refer to the difference between a stock’s actual return and the return expected under normal market conditions. By examining these movements around fraud announcements, the researchers sought to identify how investors reassessed the value and risk of affected banks.
Prof. Das said the analysis found significant negative abnormal returns for banks directly affected by fraud, particularly public sector banks. Private sector banks, by comparison, generally experienced delayed or less pronounced market reactions.
The findings suggest that investors’ responses to financial misconduct vary across institutions, with ownership structure playing an important role in shaping market perceptions, Prof. Das said.
Fraud announcements affect other banks
The study also identified spillover effects, indicating that fraud disclosures can influence the share prices of banks beyond those directly implicated.
Dr. Dahal said the extent of these effects varied according to ownership structure and the timing of announcements. This suggests that news of financial misconduct at one institution can influence investor sentiment towards other banks, reflecting the interconnected nature of the banking sector.
Another finding was that larger and more mature banks demonstrated greater resilience to fraud-related market penalties. The researchers suggested that institutional size and accumulated experience could help moderate adverse market reactions.
The findings highlight the role of reputation and institution-specific characteristics in shaping investor confidence. While fraud disclosures can damage perceptions of a bank’s reliability, the extent of the market response may differ depending on the institution’s standing and other characteristics.
Implications for banking governance
The research examines both the immediate market response to banking fraud and its potential consequences for other financial institutions, addressing an important aspect of how India’s financial markets respond to institutional failures.
The findings have implications for banking regulators, investors and financial professionals seeking to understand the market consequences of fraud disclosures. They also underscore the importance of transparency, credible institutional safeguards, sound governance and effective risk management in maintaining confidence in the banking system.
For investors, the study suggests that assessing fraud-related risks requires consideration of factors beyond the incident itself, including a bank’s ownership structure, size, maturity and institutional reputation.
The researchers said stronger governance practices and effective safeguards are essential to reducing vulnerabilities and sustaining trust in India’s banking sector.
Also Read: Why Northeast India’s tourism boom needs a reality check