Class action lawsuits and executive stock option exercise

Daniel Bradley, Brandon N. Cline and Qin Lian

Journal of Corporate Finance, 2014, vol. 27, issue C, 157-172

Abstract: In a large sample of shareholder initiated class action lawsuits from 1996 to 2011, we find a significant increase in informed insider option exercises during the class action period compared to the preceding quarter, and we find that this change is positively related to the probability of litigation. The market reaction to the announcement of lawsuits is negatively related to abnormal informed option exercises, but positively related to suits that ultimately get dismissed. These results suggest that the market can at least partially anticipate the merits and severity of the class action suit. In subsequent analyses, we find that CEO turnover is positively related to litigation, but not option exercises. Collectively, our results indicate that insiders knowingly trade on their private information.

Keywords: Class action lawsuit; Insider trading; Private information; Executive stock options (search for similar items in EconPapers)
JEL-codes: G34 G38 K22 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:27:y:2014:i:c:p:157-172

DOI: 10.1016/j.jcorpfin.2014.04.002

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