Does Litigation Risk Deter Insider Trading? Evidence from Universal Demand Laws

70 Pages Posted: 21 Jun 2019 Last revised: 30 Jun 2021

See all articles by Binay Adhikari

Binay Adhikari

University of Texas at San Antonio

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration

Bina Sharma

University of Texas Rio Grande Valley

Date Written: June 29, 2021

Abstract

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

Adhikari, Binay Kumar and Agrawal, Anup and Sharma, Bina, Does Litigation Risk Deter Insider Trading? Evidence from Universal Demand Laws (June 29, 2021). Available at SSRN: https://ssrn.com/abstract=3404720 or http://dx.doi.org/10.2139/ssrn.3404720

Binay Kumar Adhikari

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
2104585349 (Phone)

Anup Agrawal (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
EFLS, Box 870224
Tuscaloosa, AL 35487-0224
United States
205-348-8970 (Phone)
205-348-0590 (Fax)

HOME PAGE: http://aagrawal.people.ua.edu/

Bina Sharma

University of Texas Rio Grande Valley ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

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