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

Binay Kumar Adhikari · Anup Agrawal · Bina Sharma

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Financial Markets and Investment Strategies Corporate Finance and Governance Securities Regulation and Market Practices

Abstract

Abstract We exploit U.S. states’ staggered adoption of Universal Demand (UD) laws to study how the risk of shareholder lawsuits affects insider trading. UD laws, which make it harder for shareholders to bring derivative lawsuits against directors and officers, lead to more profitable insider trades, especially sales. This effect is stronger among smaller firms and firms with lower institutional monitoring. After UD laws, the timing of insiders’ trades also appears more opportunistic and riskier, for example, sales increase before negative earnings surprises. Overall, our study offers clean evidence that the threat of shareholder litigation deters opportunistic insider trading.

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References

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