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Researcher finds merit in controversial lawsuits

seonghee_han [1]Seonghee Han examines the relationship between insider trading and shareholder lawsuits. These controversial lawsuits can be seen as a direct way for shareholders to protect themselves. But they can also be viewed as frivolous and overly numerous, with attorneys filing lawsuits based solely on a drop in stock price preceded by an insider sale.

“Settlement amounts are not trivial to firms, so it’s important to know the determinants of litigation risk. That’s what financial literature tries to do,” says Han, who earned a master’s degree in statistics at Yale University before coming to Binghamton’s School of Management as a doctoral candidate.

Previous research on the relationship between insider stock sales and the risk of litigation has been inconclusive, Han says. She thinks that’s because previous studies covered too small a sample period and looked too broadly at insider trading.

In her work, Han narrowed the focus by breaking out insider trading by high-level managers, namely, chief executive officers and chief financial officers, and whether these trades were based on a normal trading pattern. Her research covers more than 90,000 insider trades and 1,700 lawsuits during a 15-year period.

“What we’ve found out is that only ‘opportunistic’ trades by high-level managers increase litigation risks when the stock price drops,” Han says.

Han’s research is important because she has found that plaintiffs seriously evaluate the potential for opportunistic trading and don’t blindly link insider sales before a crash in stock value with fraud, says Murali Jagannathan, an associate professor of finance and Han’s dissertation adviser.

This conclusion calls into question contentions that lawsuits are mostly frivolous and, as such, has policy implications for lawmakers who may be looking at regulations to make it more difficult to file shareholder lawsuits, he says.

Han’s methodical approach is a great strength in her research, Jagannathan says. “A lot of people are very interested in finding out what happens, but to actually do the work, with the detail needed, is kind of boring,” he says. “She does a good job in terms of being exact and always thinking about not making mistakes.”

Han became interested in the world of finance and an academic career after taking business courses while studying journalism at Ewha Women’s University in South Korea. She’s driven by her desire to do empirical research.

“Without numbers you can’t show anything. You just have to guess,” she says. “But you can convince others with numbers.”

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