Unmasking market turmoil by decoding stock market dynamics post-fraud allegations: Evidence from Adani-Hindenburg case

Abstract

The article investigates how the devastating repercussions of fraud allegations, as outlined in the Hindenburg report, are actively and critically affecting the stock prices of the Adani Group. This investigation, which explores the foundation of the accused companies' financial health and market trust, is crucial. These ramifications go far beyond Adani Group and are highly relevant to potential investors globally, highlighting the urgent need for a thorough comprehension of these dynamics in the context of the global market environment. The journey from stock market crash to market correction is analyzed using the theoretical lens of Risk Aversion theory. At the same time, the Efficient Market Hypothesis (EMH) assumptions are being tested. The study employs a long-term event study approach to analyze the stock price impact of the Hindenburg report using the Cumulative Abnormal Returns (CAR) methodology. For analysis, a sample of six Adani group companies and relevant stakeholders like creditors, LIC, immediate counterparts of each company, and NIFTY bank indices are considered. The study finds that the stock prices of four out of six Adani Group companies declined significantly after the Hindenburg report, defying the assumptions of the EMH. Risk-seeking investors' regulatory assurance and investment may have helped in a market correction. The associated banks (lenders to Adani) and Banking indices depicted a price decline on the second and third days, which reversed on the fourth day, indicating a diminished spillover effect. Moreover, no competitor besides Tata Power saw abnormally large gains. This study analyses the event from the lens of Risk aversion and tests the assumption of EMH. The study concludes that these findings have practical implications for investors (risk-averse and risk-seeking), policymakers, and researchers.