While several facets of financial misconduct have been explored, one aspect which has largely bypassed the attention of researchers is the factors affecting such misconduct behavior in banks. To investigate this in detail, this paper aims to use disaggregated data on Indian banks for an extended period to understand the factors driving such behavior.
Given the longitudinal nature of the data, the author uses fixed effects regression methodology which enables us to control for unobserved characteristics that might affect the dependent variable.
The analysis indicates that both bank- and board-specific factors are important in driving financial misconduct, although their importance differs across ownership. In particular, while size and capital are relevant for public banks, liquidity is more of a concern for private banks as compared with their public counterparts. In addition, the relevance of bank boards is important only in case of private banks. These results hold after controlling for the structure of the banking industry and the macroeconomic environment.
To the best of the author’s knowledge, this is one of the earliest studies for India to carefully examine the interface between financial misconduct and bank behavior in a systematic manner.
