Trading by Bank Insiders Before and During the 2007-2008 Financial Crisis

59 Pages Posted: 22 Nov 2011 Last revised: 17 Feb 2018

See all articles by Peter Cziraki

Peter Cziraki

University of Toronto - Department of Economics; Tilburg Law and Economics Center (TILEC)

Date Written: May 10, 2017

Abstract

This paper sheds new light on the role bank executives played in the financial crisis. It examines whether they foresaw the poor performance of their own bank by analyzing their insider trading patterns. Insider trading during 2006 predicts stock returns during the crisis: a portfolio strategy based on insider trading information earns a risk-adjusted return of over 40% during the crisis. Further, banks with a high exposure to the housing market and banks with a low exposure exhibit different insider trading patterns starting in mid-2006, when US housing prices first decline: insiders of high-exposure banks are 20% more likely to sell stock than insiders of low-exposure banks. This pattern is more pronounced for CEOs than other insiders. However, insider trading patterns of high- and low-exposure banks do not differ before 2006. Replacing high-exposure banks by too-big-too-fail banks yields similar results. This evidence indicates that insiders of high-exposure and too-big-too-fail banks revised their assessment of their banks’ investments following the reversal in the housing market.

Keywords: insider trading, financial crisis, executive compensation

JEL Classification: G01, G14, G21

Suggested Citation

Cziraki, Peter, Trading by Bank Insiders Before and During the 2007-2008 Financial Crisis (May 10, 2017). Journal of Financial Intermediation, Vol. 33, pp. 58-82, January 2018. Available at SSRN: https://ssrn.com/abstract=1962719 or http://dx.doi.org/10.2139/ssrn.1962719

Peter Cziraki (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada
+1 416 946 3298 (Phone)

HOME PAGE: http://www.economics.utoronto.ca/petercziraki

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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