Political Connections and Insider Trading

Abstract

This paper investigates whether directors' political connections affect their behavior in financial markets. We conjecture that directors feel protected by their political connections, which translates in lower perceived enforcement probability. We use the French $2007$ presidential election as a plausibly exogenous change in the value of political connections in a difference-in-differences research design. Specifically, we examine the behavior of directors of publicly listed companies that are connected to the future President --- through campaign donations or direct friendships --- compared to other directors before and after the election. We find larger two-day cumulative abnormal returns around the disclosure of purchases by politically-connected directors, suggesting that they are more likely to trade on private material information. Furthermore, we observe that the probability to break the disclosure time limit increased significantly for connected directors after the election. Overall, our results indicate that politically-connected directors have a sense of impunity and engage in fraudulent behavior.

Keywords: Insider Trading, Politics of Financial Markets, Securities Regulation

JEL Classification: G14, G18, G38, K22