Trading by Bank Insiders Before and During the 2007-2008 Financial Crisis
University of Toronto - Department of Economics; Tilburg Law and Economics Center (TILEC)
May 26, 2016
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. However, insider trading patterns of high- and low-exposure banks do not differ before 2006. This evidence indicates that insiders of high-exposure banks revised their assessment of their banks’ investments following the reversal in the housing market.
Number of Pages in PDF File: 49
Keywords: insider trading, financial crisis, executive compensation
JEL Classification: G01, G14, G21
Date posted: November 22, 2011 ; Last revised: May 28, 2016