Lumami, Oct 22: Nagaland University and Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya Tulungia researchers found that major banking fraud announcements leads to major negative stock market reactions. They found that this trend was more pronounced with public sector banks, which experienced sharper losses than their private sector counterparts.
The findings highlighted how ownership structure, institutional credibility and the size and maturity of a bank had a major influence on investor responses when financial misconduct occurs.
Banks play a key role in driving economic growth, mobilising financial resources and supporting businesses and individuals. However, financial fraud and unethical practices continue to occur despite regulatory reforms and oversight mechanisms. Such incidents can affect not only a bank’s financial performance but also shareholder wealth and confidence in the wider financial system.
This study examined how major banking fraud disclosures affected share prices of banks involved. The researchers also looked at whether these events had a spillover effect on other banks and investigated institutional characteristics that help banks maintain stock market stability during such crises.
The findings were published in BRICS Journal of Economics (https://doi.org/10.3897/brics-econ.7.e183393), a peer-reviewed, open-access journal published by Lomonosov Moscow State University, focusing on economic development, financial systems, global economic processes and the economic dimensions of BRICS cooperation. The paper was co-authored by Prof. Joy Das from Nagaland University and Dr. Mahesh Dahal from Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya Tulungia, Assam.
Highlighting the need for academia to study such issues that are critical to the country, Prof. Jagadish Kumar Patnaik, Vice-Chancellor, Nagaland University, said,
“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. I congratulate Prof. Joy Das and the researchers from Nagaland University and Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya, Tulungia, for this valuable contribution to contemporary financial research.”
‘ABNORMAL STOCK RETURNS’
The researchers analysed four major banking fraud cases involving IDBI Bank, Punjab National Bank, Bank of India and Canara Bank. The team used stock market data from the Bombay Stock Exchange and applied event study methodology and regression analysis to assess abnormal stock returns around the disclosure of frauds.
Elaborating on the study, Prof. Joy Das, Department of Commerce, Nagaland University, said,
“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.”
Further, Dr. Mahesh Dahal, Assistant Professor, Department of Commerce, Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya Tulungia, Assam, added,
“We also found spillover effects, suggesting that fraud announcements can influence 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, highlighting the interconnected nature of investor sentiment within the banking sector.”
Another key finding was that larger and more mature banks demonstrated greater resilience to fraud-related market penalties. Their size and accumulated institutional experience appeared to help moderate adverse stock market reactions.
These results highlighted the importance of institutional reputation and firm-specific attributes in building investors' trust. Although fraud disclosure may negatively affect the perception about the reputation and reliability of a bank, the effect of disclosure in the market may differ based on the bank's reputation among others.
The study addresses an important gap in research on the Indian financial market by examining both the banks directly affected by fraud and other institutions exposed to potential spillover effects. Its findings offer insights for banking regulators, investors and financial professionals seeking to understand how markets respond to institutional failures.
The research highlights the need for robust governance practices, credible institutional safeguards and effective risk management to help strengthen confidence in India's banking system. For investors, understanding how ownership structure, bank size and institutional credibility influence market reactions can provide a more informed basis for assessing the risks associated with fraud-related disclosures.
