Political Connections: Evidence from Insider Trading Around TARP
39 Pages Posted: 15 Dec 2016 Last revised: 27 Apr 2018
Date Written: September 1, 2016
To test for private information leakages from government to corporate executives, we exploit the 2008-2010 bank bailouts after Lehman’s failure using insider trading and political connections. In politically-connected banks, insider buying during the pre-TARP period is associated with increases in abnormal returns around bank-specific TARP announcement; for unconnected banks, trading and returns are uncorrelated. Results hold across insiders within the same bank and are stronger for finance-related government connections. Through a FOIA request we obtained the previously undisclosed TARP funds requested; the ratio of received to requested funds correlates both with abnormal returns and insider buying behavior in connected banks.
Keywords: Political connections, Political economy in banking, Insider Trading, TARP, bank bailouts
JEL Classification: D72, G01, G21, G28
Suggested Citation: Suggested Citation