Stock Market Trading in the Aftermath of an Accounting Scandal

This paper studies the impact of fraud revelation on trading behaviour of investors. It ask, if investors with direct exposure to stock market fraud (treated investors) are more likely to cash out of 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. This paper, for the first time, is able to capture trading behaviour on a daily basis for an extended period of time instead of basing the analysis on household survey data, or observing investors at monthly or yearly frequency.