Surveillance action: Examining its efficacy and its relationship with earnings management and corporate governance

This study investigates the effectiveness of a specific surveillance action implemented by the Stock Exchange of India—namely, clarification in case of spurt in price or volume, which is issued to a firm in response to unusual movement in price or trading volume. There are firms which face this market surveillance measure occasionally, while others face this more often. This study therefore evaluates the effectiveness of this market surveillance measure in both the short and long term. It further explores the relationship between surveillance action, firms' earnings management practices, and corporate governance quality. The dataset, related to this specific surveillance action, sent by the stock exchange to the firm during the financial years 2011–12 to 2019–20, was hand-collected for this purpose. The findings of this study provide evidence of the effectiveness of surveillance action in the short term as a sharp drop in average abnormal return of firms is witnessed once the notice for clarification is issued. Moreover, the study finds that firms with stronger governance mechanisms, such as institutional ownership, are approximately 28% less likely to face this surveillance action. The findings have important regulatory implications, as they underscore the limited efficacy of current surveillance measures and highlight the need for more robust oversight mechanisms.