Ownership and investor responses to news on fraud and pecuniary actions: a comparative analysis of Indian banks
| Date | 18 July 2024 |
| Pages | 45-63 |
| DOI | https://doi.org/10.1108/JMLC-12-2023-0200 |
| Published date | 18 July 2024 |
| Author | Akila Anantha Krishnan,Angan Sengupta |
Ownership and investor responses
to news on fraud and pecuniary
actions: a comparative analysis
of Indian banks
Akila Anantha Krishnan
School of Business, Amrita Vishwa Vidyapeetham, Coimbatore Campus,
Coimbatore, India, and
Angan Sengupta
School of Business, Amrita Vishwa Vidyapeetham, Bangalore Campus,
Bangalore, India
Abstract
Purpose –This study aims to understand investors’reactions to news on fraud and pecuniary and
regulatoryaction in privately owned and government-owned banks.
Design/methodology/approach –To examine the role of ownership holdings, this study deploys event
study methodology and cross-sectional regression to analyze the abnormal returns and the intergroup dynamics.
Event study methodology studies the abnormal return on stock prices on days when fraud, pecuniary actions
and regulatory news were reported for 36 banks that are listed on the NSE. Data on news has been collected from
Reuters for 110 months. Cross-sectional regression analyses are done to examine whether selected variables on
bank characteristics influence the abnormal returns. Exploring the intergroup dynamics between government
and privately owned banks helps to accentuate how stakeholders influence investor responses.
Findings –Private and government-ownedbanks display an anomalous return pattern during the events,
though to varying degrees and for a longer duration. The sharp downturn observed in private banks in
response to pecuniary andregulatory actions related to news can be attributed to the associated riskof these
banks. Intergroup dynamics further demonstratethat the effect of such news regarding government-owned
bank stocks is morepronounced on privately owned banks comparedto the effect of news related to privately
owned bankson publicbanks.
Originality/value –The study shows how ownership structure variedly impactsinvestors’response to
news related to fraud, andpecuniary and regulatory actions on Indian banks, whichmay eventually ask for
customizedinvestment approaches for government-owned and privatelyowned banks.
Keywords Banking, Event study methodology, Fraud, Pecuniary action, Investor response,
Ownership holdings
Paper type Research paper
1. Introduction
It takes twenty years to build a reputation and five minutes to ruin it –Warren Buffet.
The reputation of an establishmentreflects how people perceive it, based on its past actions
and expected future behavior. It is a valuableasset that influences stakeholder expectations
The authors gratefully acknowledge the comments and suggestions made by anonymous reviewers.
Funding: The author received no financial support for the research, authorship and/or publication
of this article.
Ownership
and investor
responses
45
Journalof Money Laundering
Control
Vol.28 No. 1, 2025
pp. 45-63
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-12-2023-0200
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
and behavior, impacting an organization’s credibility and standing (Fombrun, 1996).
A positive reputation takestime to build but can quickly be damaged by incidentslike fraud
(Coff, 1997), which can harm a firm’s earnings, cashflows, systematic risk and credit rating
(Waddock and Graves, 1997). Trust from investors, especially in the banking industry, is
crucial (Walter,2016).
The bankingsector is highly exposed to reputational risk, makingit sensitive to incidents
like fraud, finesor regulatory actions, which cannegatively affect future performance due to
the importanceof trust (Gully-Hart, 2005). In the worstcase, reduced investor confidence can
create a systemicissue, affecting allbanks and potentially theentire economy.
1.1 The Indian banking saga
The Indian banking sector hasundergone significant changes since economic liberalization,
including reforms in ownership structure. Government ownership, once dominant due to
nationalization, hasdecreased to 60%, with 12 banks remaining as of 2021. Privatization,as
suggested by Verbruggeet al. (1998), has played a key role in these reforms.
Operational and governancemechanisms have evolved based on recommendations from
committees like Narasimham and Nayak. Despite being well-regulated, the sector faces
obstacles such as financial distress and ethical lapses, negatively impacting bank
reputations. Incidents of fraud have surged from 5,569 in 2011–2012 to 8,707 in 2019–2020,
with the value increasing from 4,448 crores to 185,644 crores, a 56.35% rise in cases and a
4,073.65% increasein value.
Regulatory bodies haveimplemented measures to detect and prevent unethicalpractices,
safeguarding stakeholder interests. Violations lead to penalties, an essential tool for bank
supervision (Marchionne et al., 2022) and a strategy to combat financial misconduct
(Macartney and Calcagno, 2019). Frauds and these punitive actions can harm reputations
and erode investortrust, especially when repeated, signaling unhealthybank operations.
Frauds erode investor confidence and bank reputation (Karpoff and Lott, 1993), critical for the
industry (Gully-Hart, 2005). The inclusion of pecuniary action and regulatory interventions like
prompt corrective action, etc. captures the gamut of events having a bearing on the investors’
perceived reputation, as these can be seen as an indicator of unsafe operations (Zeidan, 2013).
Such incidents ripple through the industry and have transient but dam aging economic and social
consequences. They also heighten investor uncertainty (Ahmad et al., 2021). Reputation risks of
an organization depend on the ownership holdings. Against the backdrop of reduced government
ownership and increased privatization in the banking sector, coupled with a rising reputation risk
due to fraud, regulatory actions and financial penalties, this study examines how ownership
structure influences investors’perceptions of fraud and fines in banks. Evaluation of fraudulent
events in the banking sector is crucial and critical, given the industry’s distinct features in a
transitional economy like India (Griffin and Mahon, 1997).
Furthermore, given the transformations occurring in the banking sector of India,
particularly the ownership structure (holding), the impact of the same on the perception of
investors is sporadic (Krishnan and Sengupta, 2023). Such perception plays a discerning
influence in the way they respondto news on frauds and pecuniary action. Such news gains
prominence as it affects the stability of banks (Tilley et al., 2017), prompting investors to
reassess risk (Jordan et al.,1999). Therefore, this study tries to assessthe role of ownership
holdings in banks on investors’interpretation of the news on fraud and pecuniary events.
This study’s results can aidpolicymakers and regulators in comprehending how ownership
holdings in banks affect investors’perceptions in response to fraud and pecuniary action
announcements. It can also help portfolio managers in assessing and redesigning the
portfolios in the event of such news. Furthermore, it can also emphasize the need for both
JMLC
28,1
46
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