Political Connections and the Informativeness of Insider Trades

108 Pages Posted: 8 Sep 2016 Last revised: 11 Aug 2020

See all articles by Alan D. Jagolinzer

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; European Corporate Governance Institute (ECGI)

Daniel J. Taylor

The Wharton School, University of Pennsylvania

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Date Written: February 1, 2020

Abstract

We analyze the trading of corporate insiders at leading financial institutions during the 2007 to 2009 financial crisis. We find strong evidence of a relation between political connections and informed trading during the period in which TARP funds were disbursed, and that the relation is most pronounced among corporate insiders with recent direct connections. Notably, we find evidence of abnormal trading by politically connected insiders 30 days in advance of TARP infusions, and that these trades anticipate the market reaction to the infusion. Our results suggest that political connections can facilitate opportunistic behavior by corporate insiders.

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, Political Connections and the Informativeness of Insider Trades (February 1, 2020). Rock Center for Corporate Governance at Stanford University Working Paper No. 222, Journal of Finance (Forthcoming), Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, 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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Daniel Taylor (Contact Author)

The Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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