A Nagaland University study finds banking fraud disclosures trigger sharper stock market losses for public sector banks, while ownership, institutional credibility and bank size influence investor reactions.
Imphal, Oct. 22: A study jointly conducted by researchers from Nagaland University and Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya, Tulungia, Assam, has found that major banking fraud disclosures trigger significant negative reactions in the stock market, with public sector banks experiencing sharper losses than their private sector counterparts.
The research highlights how ownership structure, institutional credibility, bank size and organisational maturity influence investor responses to financial misconduct. It also identifies spillover effects, indicating that fraud announcements can affect the share prices of banks beyond the institutions directly involved.
The findings were published in the BRICS Journal of Economics, a peer-reviewed, open-access journal published by Lomonosov Moscow State University that focuses on economic development, financial systems, global economic processes and the economic dimensions of BRICS cooperation.
The paper, available at https://doi.org/10.3897/brics-econ.7.e183393, was co-authored by Prof. Joy Das of the Department of Commerce, Nagaland University, and Dr. Mahesh Dahal, Assistant Professor in the Department of Commerce at Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya, Tulungia, Assam.
Banks play a crucial role in economic development by mobilising financial resources, supporting businesses and facilitating transactions for individuals and institutions. However, financial fraud and unethical practices continue to pose challenges despite regulatory reforms and oversight mechanisms. Such incidents can undermine a bank's financial performance, affect shareholder wealth and weaken confidence in the wider financial system.
Against this backdrop, the researchers examined how major banking fraud disclosures affected the share prices of the banks involved. They also investigated whether such announcements influenced other banking institutions and assessed the institutional characteristics that could help banks withstand fraud-related market shocks.
The research analysed four major banking fraud cases involving IDBI Bank, Punjab National Bank, Bank of India and Canara Bank. Using stock market data from the Bombay Stock Exchange (BSE), the researchers employed event study methodology and regression analysis to assess abnormal stock returns around the disclosure of the frauds.
The analysis focused on market movements associated with the announcements to understand how investors assessed the risks and institutional implications of financial misconduct.
Explaining the findings, Prof. Joy Das said the study identified significant negative abnormal returns for banks directly affected by fraud, particularly public sector banks.
“We found significant negative abnormal returns for banks directly affected by fraud, particularly public sector banks. In contrast, private sector banks generally exhibited delayed or less pronounced market reactions. The differences indicate that investors do not respond the same to all banking frauds and that ownership structure plays an important role in shaping market perceptions,” he said.
The findings suggest that the market response to banking fraud is not uniform across institutions. Differences in ownership structure and investor perceptions of institutional credibility appear to influence the extent and timing of stock price reactions.
The study also identified spillover effects, indicating that financial misconduct at one institution may influence investor sentiment towards other banks in the sector.
Dr. Mahesh Dahal said the researchers found that fraud announcements could affect the share prices of banks beyond the institution directly involved. The extent of these effects varied according to ownership structure and the timing of the announcements.
These findings highlight the interconnected nature of investor sentiment in the banking sector. When a major fraud comes to light, market participants may reassess not only the institution concerned but also the governance standards, risk exposure and credibility of other banks.
The possibility of spillover effects makes fraud-related disclosures relevant to the wider financial system, rather than solely to the bank at the centre of an incident. It also underlines the importance of maintaining confidence in institutional controls and risk-management practices across the sector.
Another key finding was that larger and more mature banks demonstrated greater resilience to fraud-related market penalties. According to the study, their size and accumulated institutional experience appeared to moderate adverse stock market reactions.
The results point to the importance of institutional reputation and bank-specific characteristics in shaping investor confidence. While a fraud disclosure can raise concerns about a bank's reliability and governance, the market impact may vary depending on the institution's established reputation and other organisational attributes.
However, the findings do not suggest that larger or more mature banks are immune to the consequences of financial misconduct. Rather, the research indicates that these characteristics may influence how investors respond when fraud becomes public.
The study thus draws attention to the relationship between ownership, institutional credibility and market behaviour, particularly when banks face allegations or disclosures that could undermine confidence in their operations.
Nagaland University Vice-Chancellor Prof. Jagadish Kumar Patnaik described the research as a significant contribution to understanding the impact of banking fraud on financial markets.
“This research is a significant contribution to understanding the impact of banking fraud on financial markets. By examining four major Indian banking fraud cases, the study highlights how ownership structure, institutional credibility and bank size influence stock market reactions. Such evidence-based research strengthens academic inquiry, promotes greater financial accountability and reinforces the importance of transparency and sound governance in the banking sector,” he said.
Congratulating Prof. Joy Das and the researchers from Nagaland University and Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya, Tulungia, the Vice-Chancellor described the work as a valuable contribution to contemporary financial research.
The research addresses an important area of inquiry in the Indian financial market by examining both the immediate market consequences for banks involved in fraud and the potential spillover effects on other institutions.
For banking regulators and financial professionals, the findings underline the need for credible institutional safeguards, transparent governance practices and effective risk-management systems. Such measures are important not only for preventing and detecting financial misconduct but also for maintaining confidence when irregularities come to light.
For investors, the study highlights the value of considering ownership structure, institutional credibility, bank size and organisational maturity when assessing the potential market consequences of fraud-related disclosures.
The researchers' findings also reinforce the broader importance of accountability and transparency in the banking sector. As financial institutions remain central to economic activity, their ability to maintain public and investor confidence is closely linked to the credibility of their governance systems and their response to financial misconduct.
By examining market reactions across four major Indian banking fraud cases, the study offers insights into how financial markets process institutional failures and why the consequences can differ across banks. Its findings contribute to the discussion on strengthening governance, improving risk management and sustaining confidence in India's banking system.
