Rules vs. Discretion in Market Surveillance of `Overvalued' stocks: Evidence From India

33 Pages Posted: 1 Oct 2020 Last revised: 3 Mar 2021

See all articles by Nidhi Aggarwal

Nidhi Aggarwal

Indian Institute of Management (IIMU), Udaipur

Surbhi Bhatia

affiliation not provided to SSRN

Bhargavi Zaveri

Independent

Date Written: February 27, 2021

Abstract

The recent episode of unusually high trading activity in stocks with weak fundamentals, such as those of GameStop Corp and AMC Entertainment, has re-focused the spotlight on stocks whose returns are not commensurate with the financial health of the firm. Regulators and stock exchanges have experimented with various surveillance tools to identify such stocks and alert investors of the risks of trading in them. In 2017, the Indian stock exchanges, in collaboration with the securities market regulator, enacted a new surveillance measure designed to identify `overvalued' stocks on the basis of a pre-specified criteria. Such stocks are then subjected to trading restrictions of varying intensity. Using a hand compiled data-set of all the securities that were placed under this surveillance action, we examine the manner of implementation of the mechanism, and its impact on the returns and liquidity of the stocks. We find that nearly a third of such securities did not satisfy the pre-specified criteria. There is considerable ambiguity in the implementation of the measure which raises critical questions about its effectiveness. Using a matched sample approach and difference-in-differences framework, we find that securities subjected to the surveillance measure, experience a decline in stock prices and liquidity. The paper contributes to a growing line of literature on the discretion applied by exchanges in surveillance practices and the quality of enforcement of rules.

Keywords: securities markets, surveillance, regulation, market quality

JEL Classification: G14, G18

Suggested Citation

Aggarwal, Nidhi and Bhatia, Surbhi and Zaveri, Bhargavi, Rules vs. Discretion in Market Surveillance of `Overvalued' stocks: Evidence From India (February 27, 2021). Indian Institute of Management Udaipur Research Paper Series, Available at SSRN: https://ssrn.com/abstract=3691093 or http://dx.doi.org/10.2139/ssrn.3691093

Nidhi Aggarwal (Contact Author)

Indian Institute of Management (IIMU), Udaipur ( email )

Mohanlal Sukhadia University Campus
Udaipur, Rajasthan 313001
India

Surbhi Bhatia

affiliation not provided to SSRN

Bhargavi Zaveri

Independent ( email )

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