Insider Trading and Litigation Risk: Do Trade Characteristics and Trader Identity Matter?

• In Event: The Role of Regulation, Litigation and Ethics in Constraining Managers

Abstract

In this paper, we document that insider trading prior to large stock price drops increases the likelihood of a class-action lawsuit being filed against the firm. We find that this is primarily driven by “opportunistic” trades by CEOs/CFOs. Insiders appear to be are aware of this and the CEOs/CFOs reduce their opportunistic trades prior to large price drops. Trades by other insiders, including their opportunistic sales, prior to a large price decline do not increase the likelihood of a lawsuit. Lawsuits also appear to focus on trades made in the near quarter prior to the price drop rather than trades made earlier, even though class action periods average well over a quarter.

Authors

• Seonghee Han, Binghamton University, SUNY

• Murali Jagannathan, Binghamton University, SUNY

• Srinivasan Krishnamurthy, North Carolina State University