Political Connections and the Informativeness of Insider Trades

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.