We examine whether litigation risk deters corporate insiders from trading on private information. We use the staggered adoption of Universal Demand (UD) laws as a source of quasi-exogenous variation in shareholder litigation risk faced by insiders. The reduced litigation risk following the passage of UD laws leads to greater tendency for corporate insiders to utilize their information advantage. Insider trading, especially opportunistic insider sales, are more informative about firms’ future performance post UD laws. Further analysis shows that the effect of UD laws on the return predictability of insider trading varies with firms’ information environment and alternative governance mechanisms in a predictable manner. The disciplinary effect of litigation is greater for more opaque firms and firms less constrained by alternative governance mechanisms such as institutional ownership and media coverage. Overall, we provide evidence consistent with the disciplinary role of shareholder lawsuits in restraining opportunistic insider trading.
| Speaker: | Dr Sumi Jung Assistant Professor, Chinese University of Hong Kong |
| When: |
3.30 - 5.00 pm |
| Venue: | School of Accountancy Level 3, Seminar Room 3-1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |