Shareholder Litigation and Insider Trading: Evidence from Derivative Lawsuits
48 Pages Posted: 27 Jan 2018 Last revised: 26 Oct 2018
Date Written: July 22, 2018
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: Suggested Citation