While prior literature focuses on the effect of ex ante litigation occurrence risk on insider trading, this paper examines how the merits and rigorousness of actual litigation affect insider trading behavior for both defendant firms and their industry peers. Using a large litigation sample from 1996 to 2009, we find a significant decrease in the intensity of the insider stock sales for defendant firms following lawsuits that score high in a composite strength index that captures the merits and rigorousness of the litigation. Further analyses indicate that the decrease is mainly driven by the decline in opportunistic insider selling. We also find the decrease to be more pronounced for the defendant firms with lower levels of ex ante litigation risk. Finally, we find a significant decrease in opportunistic insider selling for industry peers of defendant firms following lawsuits, especially when the lawsuits are strong, suggesting a positive externality of shareholder litigation. This paper provides the first evidence on the existence of and variations in the deterrent effect of actual class action lawsuits on insider trading.
Does Shareholder Litigation Deter Insider Trading? Available to Purchase
We are grateful for the very helpful comments from Editors Bernard Black and Joshua Ronan, the two anonymous reviewers, Weiling Song (the discussant at the 2015 Journal of Law, Finance, and Accounting Conference in Hong Kong), Vishal Baloria, Lamia Chourou, Maria Correia, David Godsell, Darren Roulstone, Steven Salterio, Kam-Ming Wan, and Michael Welker. We also wish to acknowledge the comments from the workshop participants at Arizona State University, Loyola Marymount University, Queen’s University, Tsinghua University, University of Hawaii, University of Texas at Dallas, Yeshiva University, the 2013 American Accounting Association Annual Meeting, the 2013 Canada Accounting Association Annual Meeting, the 2013 European Accounting Association Annual Meeting, the 2013 China International Conference in Finance, and the 2015 Journal of Law, Finance, and Accounting Conference in Hong Kong.
Cheng CSA, Huang HH, Li Y (2016), "Does Shareholder Litigation Deter Insider Trading?". Journal of Law, Finance and Accounting, Vol. 1 No. 2 pp. 275–318, doi: https://doi.org/10.1561/108.00000007
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