Stock Market Participation in the Aftermath of an Accounting Scandal

This paper studies the impact on investor behaviour of fraud revelation. The paper ask if investors with direct exposure to stock market fraud (treated investors) are more likely to decrease their participation in the stock market than investors with no direct exposure to fraud (control investors)? Using daily investor account holdings data from the National Stock Depository Limited (NSDL), the largest depository in India, it finds that 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. Over the period of a month,there is no difference in the trading behaviour of the treated and control investors. These results are contrary to those found in mature economies.