Anticipating the Financial Crisis: Evidence from Insider Trading in Banks

45 Pages Posted: 15 May 2016

See all articles by Ozlem Akin

Ozlem Akin

Ozyegin University

Jose M. Marin

Universidad Carlos III de Madrid

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

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Date Written: May 12, 2016

Abstract

Banking crises are recurrent phenomena, often induced by ex-ante excessive bank risk-taking, which may be due to behavioral reasons (over-optimistic banks neglecting risks) and to agency problems between bank shareholders with debt-holders and taxpayers (banks understand high risk-taking). We test whether US banks' stock returns in the 2007-08 crisis are related to bank insiders' sale of their own bank shares in the period prior to 2006:Q2 (the peak and reversal in real estate prices). We find that top-five executives' ex-ante sale of shares predicts the cross-section of banks returns during the crisis; interestingly, effects are insignificant for independent directors' and other officers' sale of shares. Moreover, the top-five executives' significant impact is stronger for banks with higher ex-ante exposure to the real estate bubble, where an increase of one standard deviation of insider sales is associated with a 13.33 percentage point drop in stock returns during the crisis period. The informational content of bank insider trading before the crisis suggests that insiders understood the risk-taking in their banks, which has important implications for theory, public policy and the understanding of crises.

Keywords: Financial crises, insider trading, banking, risk-taking, agency problems in firms

JEL Classification: G01, G02, G21, G28

Suggested Citation

Akin, Ozlem and Marin, Jose M. and Peydro, Jose-Luis, Anticipating the Financial Crisis: Evidence from Insider Trading in Banks (May 12, 2016). Available at SSRN: https://ssrn.com/abstract=2779048 or http://dx.doi.org/10.2139/ssrn.2779048

Ozlem Akin

Ozyegin University ( email )

Nisantepe Mah. Orman sok.
Cekmekoy
Istanbul, 34794
Turkey

Jose M. Marin (Contact Author)

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

HOME PAGE: http://www.josemarin.com

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

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