Political connections and informed trading: Evidence from TARP

Authors: Ozlem Akin, Nicholas S. Coleman, Christian Fons-Rosen and José-Luis Peydró

Financial Management, Vol. 3, No 1, 1-48, September, 2019

Abstract We study insider trading behavior surrounding the largest bank bailout in history: TARP. 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.

This paper originally appeared as Barcelona GSE Working Paper 935