Banking fraud disclosures trigger negative stock market reactions: NU Study

Lumami, October 22 (MExN): A study by researchers from Nagaland University and Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya, Tulungia, Assam, has found that announcements of major banking frauds trigger significant negative stock market reactions, with public sector banks experiencing sharper losses than their private sector counterparts.The findings highlight how ownership structure, institutional credibility, and a bank's size and maturity influence investor responses to financial misconduct.The study examined the impact of major banking fraud disclosures on the share prices of affected banks, their spillover effects on other financial institutions, and the institutional characteristics that may help banks withstand market volatility during such crises.The findings were published in the peer-reviewed, open-access BRICS Journal of Economics, published by Lomonosov Moscow State University. The paper was co-authored by Prof. Joy Das of the Department of Commerce, Nagaland University, and Dr. Mahesh Dahal of the Department of Commerce, Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya, Tulungia, Assam.Welcoming the research, Nagaland University Vice-Chancellor Prof. Jagadish Kumar Patnaik said the study made 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,” he said, adding that evidence-based research strengthened academic inquiry, promoted financial accountability and reinforced the importance of transparency and sound governance in the banking sector.The researchers 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), they applied event study methodology and regression analysis to assess abnormal stock returns around the announcements.Prof. Das said the study found significant negative abnormal returns for banks directly affected by fraud, particularly public sector banks. Private sector banks, by contrast, generally experienced 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.Dr Dahal said the research also identified spillover effects, suggesting that fraud announcements could 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 announcements, highlighting the interconnected nature of investor sentiment within the banking sector, he said.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 moderate adverse stock market reactions.The researchers noted that the findings underscored the importance of institutional reputation and bank-specific characteristics in maintaining investor confidence. While fraud disclosures could undermine perceptions of a bank's reliability, the extent of the market impact varied depending on the institution's characteristics and reputation.The study addresses a gap in research on the Indian financial market by examining both the direct effects of fraud disclosures on implicated banks and the potential spillover effects on other institutions.Its findings offer insights for banking regulators, investors and financial professionals seeking to understand market responses to institutional failures. The researchers also highlighted the need for robust governance practices, credible institutional safeguards and effective risk management to strengthen confidence in India's banking system.For investors, understanding how ownership structure, bank size and institutional credibility influence market reactions could help in assessing risks associated with fraud-related disclosures.