Nissan and Mitsubishi shares slumped in Tokyo trade, after the arrest of chairman Carlos Ghosn.
Shares in Nissan sank 5.5% and Mitsubishi Motors tumbled 6.9%.
Ghosn is accused of under-reporting his income by 5bn yen ($44.4m; £34.5m) over five years, prosecutors said. He is also said to have used company assets for personal purposes.
Ghosn heads up the Japanese-French alliance Renault-Nissan-Mitsubishi.
Both Nissan and Mitsubishi have said they are preparing to remove him from his posts.
The board of Renault is also due to meet to decide Ghosn’s future.
In a late night press conference on Monday, Nissan said an internal investigation prompted by a whistleblower had revealed “significant acts of misconduct”.
Nissan Chief Executive Hiroto Saikawa said “too much authority was given to one person in terms of governance,” speaking at the Yokohama headquarters of the firm.
“I have to say that this is a dark side of the Ghosn era which lasted for a long time,” Hiroto said adding he was still thinking through whether Ghosn was “a charismatic figure or a tyrant”.
Prosecutors later said in a statement that Ghosn and Representative Director Greg Kelly conspired to understate Ghosn’s compensation starting in 2010.
Ghosn is accused of filing annual securities reports containing fake statements, which could mean up to 10 years in prison, or a fine of 10m yen, or both.
From 2010, Japanese firms have been required to disclose the salaries of executives who earn more than 100m yen.
Japanese prosecutors also said they had already raided Nissan’s Yokohama headquarters, near Tokyo, as part of their investigation.
There has been no comment from Ghosn or Kelly.
As misconduct revelations emerged, the future of the car alliance led by Ghosn remained unclear. He has been credited with turning around both Nissan and Renault before becoming the linchpin of the alliance the firm’s later formed.
The Renault-Nissan-Mitsubishi Alliance sold 10.61 million passenger cars and light commercial vehicles, making it the number-one automotive group worldwide.
Nissan chief executive Saikawa insisted the partnership “will not be affected by this event”.