A Stock Market Consequences of Financial Fraud: Evidence from Fraudulent Firms Listed on PSX

Abstract

This study examines the impact of financial fraud on the stock performance of 59 non-financial firms listed on the Pakistan Stock Exchange, as identified by the Securities and Exchange Commission of Pakistan (SECP). Financial fraud poses a serious threat to market efficiency, investor confidence, and firm valuation, yet limited empirical evidence exists on its long-term financial consequences in emerging markets. Using a sample of 59 fraudulent firms identified by the Securities and Exchange Commission of Pakistan (SECP), the study analyzes post-fraud performance over a five-year period, under the condition that these firms remained going concerns. Given the reputational and financial risks associated with fraud, the study analyzes post-fraud data over five years using a Two-Stage Least Squares (2SLS) regression and event study methodology. Results show significant negative abnormal returns, increased trading volume, and a decline in market capitalization following fraud disclosures. The 2SLS model confirms that increased bid-ask spreads—reflecting information asymmetry—are linked to lower stock returns. These findings highlight the long-term financial consequences of fraud and emphasize the need for stronger regulatory oversight and improved corporate governance to protect investor confidence.