Are Bank Stock Prices Sensitive to Risk Management? Evidence from India

Sound risk management practice is the backbone of present day commercial banking. A bank has to manage several risks in the course of production and delivery of various financial services. This study attempts to summarize the information contained in bank financial statements on the diverse risks faced by banks and then ascertain whether stock markets respond to risk management behaviour. To this end, we compute risk management scores for Indian commercial banks for the period 1999-2006 by summarizing accounting ratios through the application of multivariate statistical techniques. Our computed scores show that risk management performance of banks has been improving over time with a recent drop in the last few years. Finally we examine whether returns on bank stocks are sensitive to the risk management scores developed in our study. The main finding is that banks with good risk management behaviour reward their shareholders with higher wealth