Shareholder Litigation and Insider Trading: Evidence from Derivative Litigation

45 Pages Posted: 27 Jan 2018 Last revised: 25 Jan 2021

See all articles by Sumi Jung

Sumi Jung

Yonsei University - School of Business

Jonathan Sangwook Nam

Hong Kong Polytechnic University

Susan Shu

Boston College - Carroll School of Management

Date Written: July 22, 2018

Abstract

We examine whether shareholder litigation deters informed insider trading, utilizing the staggered adoptions of Universal Demand (UD) laws by different states. The UD laws substantially raise the hurdle for shareholders to file derivative litigation. We find that corporate insiders significantly increase opportunistic trades, including both insider purchases and sales, after the passage of UD laws, suggesting derivative litigation serves a disciplinary role in curbing insider trading. The deterrence effect of derivative litigation complements that of federal securities litigation, as it is useful in reducing informed insider trading activity unaccompanied by investor losses such as insider purchases. The deterrence effect on insider trading is more pronounced for firms with limited media coverage and high information asymmetry, and for corporate insiders facing less risk of other enforcement actions. Overall, our evidence suggests that shareholder litigation in the form of derivative litigation plays a unique role in curbing informed insider trading.

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

JEL Classification: G14, G34, K22, M12

Suggested Citation

Jung, Sumi and Nam, Jonathan Sangwook and Shu, Susan, Shareholder Litigation and Insider Trading: Evidence from Derivative Litigation (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

Yonsei University - School of Business ( email )

526 Yonsei University School of Business
50 Yonsei-ro, Seodaemun-gu
Seoul, 03722
Korea, Republic of (South Korea)

Jonathan Sangwook 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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