When Does Insider Selling Increase Litigation Risk?

52 Pages Posted: 14 Sep 2014

See all articles by Seonghee Han

Seonghee Han

Pennsylvania State University

Murali Jagannathan

SUNY at Binghamton - School of Management

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management

Date Written: September 12, 2014

Abstract

In broad samples, insider selling does not increase the likelihood of a class-action lawsuit filing. In this paper, we examine the reasons behind this finding. We find that insider sales significantly increase lawsuit probability only when we jointly consider insider identity, insider sale timing, and the abnormal nature of the trade, during a period just before large price drops. Specifically, opportunistic sales by CEOs in the quarter prior to stock price crashes is associated with a significantly higher likelihood of a lawsuit. Sales by other insiders, including their opportunistic sales, do not materially impact the likelihood of a lawsuit. These findings are not constrained to firms in litigation intensive industries. CEOs appear to be aware of the impact of their selling activities on litigation risk and, on average, reduce their opportunistic sales prior to a crash. Though such decreases do not significantly reduce the likelihood of a subsequent lawsuit, they attenuate the negative market reaction to a lawsuit filing.

Keywords: Insider selling, Stock price crashes, Lawsuits

JEL Classification: G14, K22, K41, M41

Suggested Citation

Han, Seonghee and Jagannathan, Murali and Krishnamurthy, Srinivasan, When Does Insider Selling Increase Litigation Risk? (September 12, 2014). Available at SSRN: https://ssrn.com/abstract=2495595 or http://dx.doi.org/10.2139/ssrn.2495595

Seonghee Han

Pennsylvania State University ( email )

1600 Woodland Road
Abington, PA PA 19001
United States

Murali Jagannathan

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-4639 (Phone)

Srinivasan Krishnamurthy (Contact Author)

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States

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