A study by researchers from Nagaland University and Pandit Deendayal Upadhyaya Adarsha Mahavidyalaya, Tulungia, Assam, has found that major banking fraud disclosures 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, bank size and maturity influence investor responses to financial misconduct.

The study 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. It was published in the BRICS Journal of Economics, a peer-reviewed, open-access journal published by Lomonosov Moscow State University.

The paper is available at https://doi.org/10.3897/brics-econ.7.e183393.

Banks play a critical role in economic growth by mobilising financial resources and supporting businesses and individuals. However, financial fraud and unethical practices continue to pose challenges 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.

According to a press release issued by Nagaland University, the study examined the impact of major banking fraud disclosures on the share prices of the banks involved, whether such announcements produced spillover effects on other banks, and which institutional characteristics helped moderate market reactions during financial crises.

Congratulating the researchers, Nagaland University Vice-Chancellor Prof Jagadish Kumar Patnaik said the research was 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.

Patnaik added that evidence-based research strengthened academic inquiry, promoted financial accountability and reinforced the importance of transparency and sound governance in the banking sector. He congratulated Prof. Das and the researchers for their contribution to contemporary financial research.

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Significant negative abnormal returns

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 disclosure of the frauds.

Explaining the findings, Prof Joy Das said the study identified 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.

Dr Mahesh Dahal said the researchers also identified spillover effects, suggesting that fraud announcements could influence the share prices of banks beyond the institution directly involved.

He said 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.

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.

The findings underline the importance of institutional reputation and bank-specific characteristics in maintaining investor confidence. Although fraud disclosures can damage perceptions of a bank’s reliability and reputation, the scale of the market response may vary depending on the institution’s standing and other characteristics.

Implications for regulators and investors

The study addresses an important gap in research on the Indian financial market by examining both banks directly affected by fraud and other institutions potentially exposed to spillover effects.

Its findings offer insights for banking regulators, investors and financial professionals seeking to understand how markets respond to institutional failures.

The research underscores 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 provide a more informed basis for assessing the risks associated with fraud-related disclosures.