Abstract

In this study, we investigate the trading patterns of corporate insiders around the announcement dates of shareholder class action lawsuits and related settlements. In particular, we explore whether these trading patterns are indicative of information asymmetries between managing and non-managing insiders. We provide evidence that litigation and settlement announcements have a significant impact on the stock prices of sued firms, and that foreknowledge of these events may be used by insiders to earn abnormal profits. We assess both actual and proposed trades by insiders in sued firms to detect abnormal trading activity prior to these events. Our results provide strong evidence of abnormal trading activity by insiders of sued firms prior to these announcements. The direction of their trades suggests the presence of informed trading prior to both litigation and settlement announcements. Moreover, we observe that managers exhibit higher abnormal trading activity than non-managing insiders prior to litigation and settlement announcements.