Asset Quality and Equity-Market Monitoring in Indian Public-Sector Banks: Evidence from FY2016-FY2025

This study examines whether equity prices monitor disclosed bank risk in banks under majority government ownership. Using a balanced panel of 12 listed Indian public-sector banks and annual financial and price data for FY2016-FY2025, it relates price returns in the following financial year to lagged changes in capital adequacy, gross non-performing assets (GNPA), the cost-to-income ratio, return on average assets, and liquidity. Annual log price returns are constructed from corporate action-adjusted financial-year-end prices and exclude cash dividends. The preferred two-way fixed effects model uses 96 bank-year observations and controls for bank size, loan growth, deposit growth, book capitalisation, and post-amalgamation periods. A one-standard-deviation increase in lagged GNPA change (about 2.94 percentage points) is associated with an annual log return lower by 0.1078 log points. The coefficient is statistically significant under bank-clustered inference (p = 0.007), an enumerated 4,096-pattern bank-cluster sign-randomisation test (p = 0.011), a 9,999 replication within-year permutation placebo (p = 0.028), and Benjamini-Hochberg adjustment across the five CAMEL coefficients (adjusted p = 0.036). It is not significant when standard errors are clustered by year (p = 0.168) or jointly by bank and year (p = 0.111), and its magnitude declines when influential return years are excluded. Quantile point estimates are more negative in the lower tail, although bank-block bootstrap intervals include zero. The findings therefore support a qualified, time-sensitive association, not a causal conclusion. Because every sampled bank is government owned, the design cannot identify the effect of state ownership or implicit public support.