Equity market reaction to regulatory reforms: a case study of Indian banks Madhvi Sethi Symbiosis Institute of Business Management Bangalore, Symbiosis International (Deemed University), Pune, India, and Dipali Krishnakumar Department of Finance, National Institute of Bank Management, Pune, India Abstract Purpose – Non-performing assets (NPAs) have been a cause of concern for the banking sector across the world and have invited a lot research interest, especially for emerging economies. In India, the NPAs grew many folds and reached alarming levels in 2013. The available mechanisms, such as Corporate Debt Restructuring Scheme, were not adequate to address this issue. The Central Reserve Bank of India with the Government of India introduced various guidelines, schemes and regulations like framework for revitalizing distressed assets to tackle NPAs during the period 2013-2017. Taking the case of India, the purpose of this paper is to examine policy initiatives and analyse the impact of regulatory shocks on the equity market returns and the systematic risk of individual banking stocks using an extended version of the market model. Design/methodology/approach – In this study, the authors design the experiment to explore the reaction of banking stocks to the various regulatory measures and also measure the change in systematic risk for these stocks as a result of the regulatory changes. Following the approach suggested by Soraokina and Thornton (2015), the authors use the extended market model to test the reaction of banking company stocks to the regulatory measures. Findings – The study finds that banking stocks did not earn signi ficant abnormal returns on the announcement of these measures. However, the systematic risk of the banking index reduced significantly on the introduction of regulatory measures, and this risk reduction has been primarily in the stocks of private sector banks. Research limitations/implications – This paper provides insights on the equity market’s short-term reaction to the reform initiatives introduced by the government. The scope of the paper is with respect to one emerging economy, India, which underwent a series of regulatory reforms to tackle the banking NPA problem. Originality/value – The paper fills an important research gap where the impact of schemes and regulations is captured for an emerging economy like India. It tries to bring forth the importance of these reforms and how an investor perceives the same. This paper tests for changes in systematic risk as measured by market beta as well as measures cumulative abnormal returns associated with important events in the process of regulatory reforms happening in India from 2013 to 2017. Keywords Banks, Systematic risk, Event studies, Banking policies, Financial institutions and regulation, Financial market Paper type Research paper Introduction and motivation Creditor rights have been linked to financial development and evidence has suggested that lowering the cost of credit may foster financial development (Porta et al., 1997; Levine, 1998; JEL classification – G21, E58, G14, G28, G18, G32 Case study of Indian banks 431 Received 3 September 2019 Revised 20 December 2019 Accepted 25 February 2020 Journal of Financial Regulation and Compliance Vol. 28 No. 3, 2020 pp. 431-464 © Emerald Publishing Limited 1358-1988 DOI 10.1108/JFRC-09-2019-0114 The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/1358-1988.htm