Shareholder Litigation and Insider Trading: Evidence from Derivative Lawsuits

Jung, Sumi; Nam, Jonathan; Shu, Susan

doi:10.2139/ssrn.3109369

“…The literature has also examined potential factors that may prevent insiders from trading on their private information. Some mitigating influences on insider trading are litigation risk (Jung, Nam, and Shu 2018), firms investing in corporate social responsibility (Gao et al 2014), and internal governance measures aimed specifically at insider trading, like requiring insiders to have general counsel approval to trade within restricted windows (Jagolinzer et al 2011). Prior studies show that external monitors, including the media (Dai, Parwada, and Zhang 2015) and institutional owners (Hillegeist and Weng 2018), lead to a reduction in insiders' trading profits.…”

Section: Insider Tradingmentioning

confidence: 99%

The Deterrent Effect of Whistleblowing on Insider Trading

Raleigh

2023

J. Financ. Quant. Anal.

0

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I study whether the Dodd–Frank whistleblower program reduced informed trading by corporate insiders. To identify the effect, I partition firms based on the extent to which this program affected the likelihood of whistleblowing at each firm. I find a relative reduction in trading profits on purchases made by insiders at more affected firms after the program was initiated. I analyze insider sales in settings where they are more likely to be informed and find a reduction in the number of sales before negatively perceived events. The results suggest that whistleblower protections and rewards can effectively deter insider trading.

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“…18 Besides the enforcement of insider trading per se, other types of lawsuits may also affect the risk of insider trading litigation, such as the merits and rigorousness of securities class action litigation (Cheng, Huang, and Li, 2016); and the risk of shareholder-initiated derivative lawsuits in state courts where the companies are incorporated (Jung, Nam, andShu 2021, Adhikari, Agrawal andSharma 2021). 19 In that decision, the SEC alleged that insider trading violates Section 10b of the Securities Exchange Act of 1934 and SEC rule 10b-5.…”

Section: Ambiguity In Determining Illegal Insider Tradingmentioning

confidence: 99%

“…To ascertain the robustness of our results, we perform four additional sensitivity tests on the effect of judge ideology on insider trading. First, we control for the risk of state derivative securities litigation by including fixed effects of the interaction between the firms' state of incorporation and year, as the risk of such litigation can also deter insider trading (Jung et al 2021;Adhikari et al 2021). Second, we control for the total compensation of the top five executives because personal wealth and income may influence an insider's trading decisions, the likelihood that they will be targeted by regulators, and the intensity of pursuit of such a case.…”

Section: Judge Ideology's Effect On Insider Tradingmentioning

confidence: 99%

Judge Ideology, SEC Enforcement, and Insider Trading

Huang

¹

,

Hui

²

,

Zheng

³

2021

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Extant evidence suggests that liberal judges prefer stricter securities enforcement to protect innocent investors. We find that firms located in circuits with more liberal judges perform fewer opportunistic insider sales, consistent with managers taking judges' preferences into consideration. This deterrent effect is stronger when insiders are more likely to be sued. The SEC also considers judge ideology when selecting litigation venues. Finally, we validate that liberal judges are associated with heavier penalties in insider trading cases. Overall, we provide the first evidence demonstrating the importance of judicial discretion and the joint efforts of government branches to deter illegal insider trading.

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“…The literature has also examined potential factors that may prevent insiders from trading on their private information. Some mitigating influences on insider trading are litigation risk (Jung, Nam, and Shu 2018), firms investing in corporate social responsibility (Gao et al 2014), and internal governance measures aimed specifically at insider trading, like requiring insiders to have general counsel approval to trade within restricted windows (Jagolinzer et al 2011). Prior studies show that external monitors, including the media (Dai, Parwada, and Zhang 2015) and institutional owners (Hillegeist and Weng 2018), lead to a reduction in insiders' trading profits.…”

Section: Insider Tradingmentioning

confidence: 99%