Volume 75, Issue 4 p. 1833-1876
ARTICLE

Political Connections and the Informativeness of Insider Trades

ALAN D. JAGOLINZERDAVID F. LARCKERGAIZKA ORMAZABALDANIEL J. TAYLOR

Corresponding Author

DANIEL J. TAYLOR

Alan D. Jagolinzer is with the Judge Business School at University of Cambridge. David F. Larcker is with the Graduate School of Business at Stanford University. Gaizka Ormazabal is with the IESE Business School at University of Navarra. Daniel J. Taylor is with the Wharton School at University of Pennsylvania. We thank Stefan Nagel (editor), an anonymous associate editor, two anonymous reviewers, and seminar participants at Cornell, Northwestern, SUNY-Binghamton, Texas A&M, UC-Davis, University of Chicago, University of Minnesota, University of Southern California, University of Utah, and the Securities and Exchange Commission. We thank Joseph Grundfest and several officials at the U.S. Treasury, Federal Bureau of Investigation, and Department of Justice for helpful comments and suggestions. We thank Michelle Gutman, Adam Bordeman, Vikram Dhawam, John Kepler, Richard Knapp, Alex Yuan, Jessica Weber, and Ruizhong Zhang for outstanding research assistance, and Ran Duchin and Denis Sosyura for sharing their data on political connections. We thank our respective schools for financial support, and acknowledge funding from the Winnick Family Faculty Fellowship at Stanford University, the Marie Curie and Ramon y Cajal Fellowships at IESE, and the Dean's Research fund at The Wharton School. We have read The Journal of Finance’s disclosure policy and have no conflicts of interest to disclose. Data on TARP application amounts and dates used in the paper were obtained from the U.S. Treasury and are provided in the Internet Appendix that is available in the online version of the article on The Journal of Finance website.

Correspondence: Daniel J. Taylor, Wharton School, University of Pennsylvania, Philadelphia, PA 19105; e-mail: dtayl@wharton.upenn.edu.

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First published: 20 March 2020
Citations: 72

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 Troubled Asset Relief Program (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.

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