Anticipating the Financial Crisis: Evidence from Insider Trading in Banks

51 Pages Posted: 1 Jun 2016 Last revised: 16 Aug 2020

See all articles by Jose M. Marin

Jose M. Marin

Universidad Carlos III de Madrid

Ozlem Akin

Ozyegin University

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 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 sales 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: agency problems in firms, Banking, financial crises, insider trading, risk-taking

JEL Classification: G01, G02, G21, G28

Suggested Citation

Marin, Jose M. and Akin, Ozlem and Peydro, Jose-Luis, Anticipating the Financial Crisis: Evidence from Insider Trading in Banks (May 2016). CEPR Discussion Paper No. DP11302, Available at SSRN: https://ssrn.com/abstract=2786904

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

Ozlem Akin

Ozyegin University ( email )

Nisantepe Mah. Orman sok.
Cekmekoy
Istanbul, 34794
Turkey

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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