Stock market participation in the aftermath of Satyam accounting scandal

Interesting paper by Renuka Sane.

The paper compares Satyam stock holding investors with non-Satyam stock holding investors during the breakout of the scam. The results show that though Satyam investors cash out of the stock intensively but the impact is not long-lasting:

We find that investors with direct exposure to Satyam trade more intensely immediately i.e. over seven days after the Satyam event relative to control investors, and that this trading was largely driven by cashing out of the portfolio. Treated investors cash out almost 10.6 percentage points of their overall portfolio relative to control investors post the crisis. The cashing out is largely restricted to the “bad stock”. If anything, treated investors make net purchases of related stocks during the same period. Over the period of a month, there is no difference in the trading behaviour of the treated and control investors. The results are robust to comparison with days of similar portfolio losses, and dealing with rumblings on the Satyam stock a few weeks prior to the scandal.

Our results are contrary to international evidence in two respects. First, our results show that the effect is restricted only to those investors and stocks that were the subject of the governance fraud, unlike results from the US which show that households withdraw from unrelated stocks as well as from the asset class itself. Second, our results show that the effect is attenuated over time. Results from the US indicate that effects of fraud are long-lasting (Gurun, Stoffman, and Yonker, 2015; Giannetti and Wang, 2016). Of course, instances of fraud may deter participation on the extensive margin, and cause fewer people to enter the market, but data restrictions prohibit us from throwing light on this important question.

The type of fraud, and the cultural and institutional settings in which the fraud takes place may vary across locations, and possibly explain the differences in our results with the international literature. In order to understand the impact of fraud revelation, and the channels through which it manifests, it is important to build up a literature that analyses such events across multiple settings. Our paper is a step in this direction.

Policy implications?

The results raise questions on the importance of the cultural and institutional settings on investor behaviour. For example, household survey data from India indicates portfolios of Indian households, are dominated by real assets such as gold and real estate, and barely 2 percent of the country participates in the stock market (Badarinza, Balasubramaniam, and Ramadorai, 2016). Within the class of investors that do participate in the stock market, it is believed (anecdotally) that retail participants are largely dominated by “day traders”. And while India does well on corporate governance metrics on the World Bank ease-of-doing business indicators, on the ground there is general skepticism about corporate governance standards.

It is in this context of limited stock market participation, and high mistrust of accounting standards that the Satyam fraud needs to be placed. In such a setting, it is possible that an accounting fraud, even as big as Satyam, does not damage trust perceptions of those already in the market relative to mature market settings with higher participation rates and higher expectations of governance standards. It is also possible that swift government action, as was taken after Satyam (Vikraman, 2016), has a larger pacifying effect in such economies than in more mature economies. Of course, instances of fraud may deter participation on the extensive margin, and cause fewer people to enter the market, but data restrictions prohibit us from throwing light on this important question.

It is a very detailed paper and the author has looked at multiple aspects of the problem. A useful paper which helps think about several research issues as well.

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One Response to “Stock market participation in the aftermath of Satyam accounting scandal”

  1. Prashant Gupta Says:

    Possible reason for not opting out of the stock market on “that” big scale can be the trust(or mistrust) in the indian market and corporate governance. Those invested in the satyam and broader market were very much convinced by the fact that this is very natural in india to get caught in scam and eventually things would turn out to be good.

    The information asymmetry was also not comparable to the developed market at that time neither is it the same right now.

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