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Political Connections and the Informativeness of Insider Trades

Author

Listed:
  • Jagolinzer, Alan D.

    (University of CO)

  • Larcker, David F.

    (Rock Center for Corporate Governance, Stanford University)

  • Ormazabal, Gaizka

    (University of Navarra)

  • Taylor, Daniel J.

    (University of PA)

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.

Suggested Citation

  • Jagolinzer, Alan D. & Larcker, David F. & Ormazabal, Gaizka & Taylor, Daniel J., 2016. "Political Connections and the Informativeness of Insider Trades," Research Papers 3473, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3473
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    Citations

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    Cited by:

    1. Adams, Renée B., 2021. "Good News for Some Banks," Working Papers 311, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    2. Otchere, Isaac & Senbet, Lemma W. & Zhu, Pengcheng, 2020. "Does political connection distort competition and encourage corporate risk taking? International evidence," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 21-42.
    3. Bushman, Robert M. & Davidson, Robert H. & Dey, Aiyesha & Smith, Abbie, 2018. "Bank CEO materialism: Risk controls, culture and tail risk," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 191-220.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K20 - Law and Economics - - Regulation and Business Law - - - General

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