Political Connections and the Informativeness of Insider Trades

60 Pages Posted: 8 Sep 2016 Last revised: 17 Jan 2018

Alan D. Jagolinzer

University of Cambridge Judge Business School

David F. Larcker

Stanford University - Graduate School of Business

Gaizka Ormazabal

University of Navarra, IESE Business School

Daniel J. Taylor

University of Pennsylvania - The Wharton School

Multiple version iconThere are 2 versions of this paper

Date Written: July 29, 2017

Abstract

We examine the relation between political connections and informed trading by corporate insiders at leading financial institutions during the Financial Crisis. We find strong evidence of a relation between political connections and informed trading, that the relation is strongest during the period in which TARP funds were disbursed, and strongest among TARP recipients. Notably, we find evidence of abnormal trading by politically connected insiders 30 days in advance of TARP infusions, and that these trades predict the market reaction to the infusion. Our results suggest that politically connected insiders had a significant information advantage during the Crisis and opportunistically timed their trades to exploit this advantage.

Keywords: Political Connections; Insider Trading; Financial Crisis; Troubled Asset Relief Program; Capital Purchase Program

JEL Classification: G14; G20; G28; G30; K2

Suggested Citation

Jagolinzer, Alan D. and Larcker, David F. and Ormazabal, Gaizka and Taylor, Daniel J., Political Connections and the Informativeness of Insider Trades (July 29, 2017). Rock Center for Corporate Governance at Stanford University Working Paper No. 222. Available at SSRN: https://ssrn.com/abstract=2836053 or http://dx.doi.org/10.2139/ssrn.2836053

Alan D. Jagolinzer

University of Cambridge Judge Business School ( email )

Trumpington Street
University of Cambridge
Cambridge, CB2 1AG
United Kingdom

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Gaizka Ormazabal

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Daniel Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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