Political Connections and the Informativeness of Insider Trades

56 Pages Posted: 25 Jul 2017

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; European Corporate Governance Institute (ECGI); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

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: July 2017

Abstract

This paper examines the relation between political connections and informed trading by corporate insiders in the context of the Financial Crisis. The unprecedented magnitude of government intervention, the substantial impact of this intervention on firm value, and the political nature of the intervention provide a powerful setting to examine the relation between political connections and informed trading. Consistent with political connections providing corporate insiders with an information advantage, we find strong evidence of a relation between political connections and the informativeness of their trades. Consistent with this relation stemming from private information related to government intervention, we find the relation is strongest during the period in which TARP funds were dispersed, and strongest among politically connected insiders at banks that received TARP funds. Examining insider trades around the announcements of TARP infusions, we find evidence of significant trading thirty days in advance of the announcement, and that these trades predict the market reaction to the announcement. Notably, we find these relations are present only for the trades of politically connected insiders. Overall, our results suggest that politically connected insiders had an information advantage during the Crisis and traded to exploit this advantage.

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

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 (July 2017). CEPR Discussion Paper No. DP12153, Available at SSRN: https://ssrn.com/abstract=3008334

Alan D. Jagolinzer (Contact Author)

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)

European Corporate Governance Institute (ECGI) ( email )

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

Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )

Crown Quadrangle 559 Nathan Ab
Stanford, CA 94305-8610
United States

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

The Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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