Shareholder Litigation and Insider Trading: Evidence from Derivative Lawsuits

48 Pages Posted: 27 Jan 2018 Last revised: 26 Oct 2018

See all articles by Sumi Jung

Sumi Jung

The Chinese University of Hong Kong (CUHK)

Jonathan Nam

Hong Kong Polytechnic University

Susan Shu

Boston College - Carroll School of Management

Date Written: July 22, 2018

Abstract

We examine the effect of shareholder litigation risk on informed trading by corporate insiders, using the staggered adoptions of Universal Demand (UD) laws which substantially raise the hurdle for filing derivative lawsuits. We find that insiders significantly increase opportunistic trades post UD laws. The effect is stronger for insider purchases than for sales. Further analysis shows that the effect is mostly driven by firms with limited media coverage, low exposure to other litigation, and large blockholders who are likely to use shareholder litigation as a governance tool. Overall, our evidence suggests shareholder litigation is effective in curbing opportunistic insider trading.

Keywords: Insider Trading, Litigation Risk, Derivative Lawsuits, Universal Demand Laws

JEL Classification: G14, G34, K22, M12

Suggested Citation

Jung, Sumi and Nam, Jonathan and Shu, Susan, Shareholder Litigation and Insider Trading: Evidence from Derivative Lawsuits (July 22, 2018). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3109369 or http://dx.doi.org/10.2139/ssrn.3109369

Sumi Jung

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Jonathan Nam (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Susan Shu

Boston College - Carroll School of Management ( email )

Boston College
140 Commonwealth Ave.
Chestnut Hill, MA 02167
United States
617-552-1759 (Phone)

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