Are All Individual Investors Created Equal? Evidence from Individual Investor Trading Around Securities Litigation Events

40 Pages Posted: 10 Jun 2005

See all articles by Paul A. Griffin

Paul A. Griffin

University of California, Davis - Graduate School of Management

Ning Zhu

China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

Date Written: June 10, 2005

Abstract

This study examines the trading behavior of a large sample of individual (retail) investors around securities litigation events. We test the hypothesis that the response of these investors around the end of the litigation class period (at the time of a corrective disclosure) and the start of the class period (at the time of disclosure of allegedly false positive information) differs on the basis of the informedness of the investors. Our tests reject the hypothesis that more informed investors exhibit the same trading behavior as less informed investors. These results contribute to the literature by documenting differences in individual investor trading around events that reveal the start and end of an alleged financial fraud. These events can be relatively difficult to interpret and, so, it is not unreasonable that we should observe differences on the basis of informedness. We also examine individual investor trading within the class period and adduce that trading intensity is higher earlier in the class period, and higher overall relative to a control period. These findings are inconsistent with the often-applied proportional trading model for the calculation of class action damages, which assumes all shares trade with equal probability.

Keywords: Individual investor behavior, accounting fraud, securities litigation damages, class period trading, investor informedness

JEL Classification: G14, G15, K22, K41

Suggested Citation

Griffin, Paul A. and Zhu, Ning, Are All Individual Investors Created Equal? Evidence from Individual Investor Trading Around Securities Litigation Events (June 10, 2005). Available at SSRN: https://ssrn.com/abstract=740485 or http://dx.doi.org/10.2139/ssrn.740485

Paul A. Griffin (Contact Author)

University of California, Davis - Graduate School of Management ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

Ning Zhu

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Yale School of Management ( email )

135 Prospect Street
Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://pantheon.yale.edu/~nz26/

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-3871 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/

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