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Do local investors know more? Evidence from securities class actions

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  • Kim, Taeyeon
  • Hwang, Hyoseok (David)
  • Kim, Hyun-Dong

Abstract

This paper explores the informed trading by mutual funds of local investments. Using hand-collected securities class actions (SCAs), we examine whether local mutual funds can avoid potential economic damage from SCAs against their portfolio firms by selling them in advance – local information advantage hypothesis. Our findings are consistent with the hypothesis. The informed selling by local funds of the SCA firms is driven by the firms with low analyst coverage and high forecasting errors, which suggests that local funds benefit the most when an SCA firm's information environment is poor. Furthermore, we find that informed trading of local funds can predict a possible outcome of the lawsuit. Finally, the magnitude of informed selling is greater when firms are closer to local funds and the class period is shorter.

Suggested Citation

  • Kim, Taeyeon & Hwang, Hyoseok (David) & Kim, Hyun-Dong, 2023. "Do local investors know more? Evidence from securities class actions," Journal of Banking & Finance, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:jbfina:v:156:y:2023:i:c:s0378426623001991
    DOI: 10.1016/j.jbankfin.2023.107008
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    More about this item

    Keywords

    Mutual fund; Geographical proximity; Information advantage; Securities class actions;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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