by C.S. Agnes Cheng, Henry He Huang, and Yinghua Li

Our research explores whether shareholder securities litigation can deter informed insider trades for both defendant firms and their peers. Corporate insiders have an information advantage over other market participants and can exploit this advantage by engaging in informed insider trades to obtain private benefits. These trades undermine the confidence of outsider shareholders in the fairness of the equity markets and reduce their participation. Consequently, regulators and investors have made it a top priority to constrain informed insider trades. However, in light of high litigation costs, it is important to question whether securities litigation can in fact constrain informed insider trades.

In a recent paper, we examine whether the level of informed insider trades decreases after the filing of Section 10b-5 federal private securities class actions, and whether this decrease is contingent on the merits and rigorousness of the litigation. Continue reading →