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Institutional Investors and Shareholder Litigation

Authors


  • We appreciate the helpful comments of Rick Sias, an anonymous referee, Bill Christie (Editor), and seminar participants at the 2006 Financial Management Association Meetings and the 2007 Western Finance Association Meetings.

Abstract

We examine whether institutional investors are able to avoid future litigation. Our results show that institutions provide a fiduciary role by decreasing or eliminating their positions in sued firms well before litigation begins. We also find that institutional groups with high monitoring ability (independent investment advisors and mutual funds) are more proactive in their trading behavior than are institutions with low monitoring ability (banks, insurance companies, and unclassified institutions such as endowments, foundations, and self-managed pension funds). We find that percentage changes in institutional ownership are correlated with public information available more than two quarters before litigation.

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