Stock market reaction to fraud outbreaks in the Indian banking sector

Liberalisation has been a catalyst for the strengthening of India’s banking sector; however, financial distress, fraud, and unethical practices continue to threaten the stability of the financial and stock markets. Such incidents have recently become both more frequent and significant in scale and impact (Singh et al., 2016). The primary focus of this study is to examine the short-term effects on valuations and the dynamics of spillover between public and private sector banks. This research examines how the equity market responds to major news of bank fraud, investigating short-term value effects and spill-over dynamics between government-owned and privately owned banks. The findings, based on an enhanced event study combined with regression analysis, suggest that fraud in private banks does not affect the victim bank, but is accompanied by negative spillovers to public sector banks. Additionally, the results show that investment shifts occur within both public and private bank segments following fraud disclosures. These patterns are further interpreted in light of institutional characteristics, such as ownership structure and operational scale. The study provides evidence specific to India on how markets respond to announcements of banking fraud.