Regulatory actions against corporate irregularities in India: analyzing the stock market impact

Abstract

In this article, I use a unique dataset consisting of listed Indian firms that have been indicted for economic malpractice/default or have been non-compliant with laws/ regulations/ guidelines to estimate the stock price impact of regulatory actions against corporate irregularities. The sample consists of regulatory charges imposed by two major Indian regulators, (i) the Ministry of Corporate Affairs (MCA) and (ii) the Securities and Exchange Board of India (SEBI). I find that regulatory actions are an effective deterrence against corporate misconduct and have a significantly negative impact on a firm’s stock price. The level of negative effect on the stock price of a firm is directly related to the severity of regulatory charges against it, i.e., cases of fraud or cheating, or payment default attract a much more negative reaction as compared to cases such as failure to disclose information, other non-compliance, etc. Finally, the results indicate that younger and less profitable firms have a higher (more negative) stock price reaction to regulatory action announcements.