Does Litigation Risk Deter Insider Trading? Evidence from Universal Demand Laws
70 Pages Posted: 21 Jun 2019 Last revised: 30 Jun 2021
Date Written: June 29, 2021
We exploit US states’ staggered adoption of Universal Demand laws to study how the risk of shareholder lawsuits affects opportunistic insider trading. UD laws, which make it harder for shareholders to bring derivative lawsuits against directors and officers (see, e.g., Houston, Lin and Xie 2018; and Appel 2019), lead to significantly more profitable insider trades, especially sales. This effect is greater in firms with higher information asymmetry or lower institutional monitoring, and comes from more opportunistic and riskier timing of trades. Our findings suggest that a decrease in litigation threat emboldens insiders to increase risk-taking and trade more profitably.
Keywords: Shareholder Lawsuits, Derivative Lawsuits, Universal Demand Laws, Litigation Risk, Insider Trading, Abnormal Returns, Difference-in-differences
JEL Classification: G14, G38, K22
Suggested Citation: Suggested Citation