Political connections and informed trading: Evidence from TARP

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

Financial Management, Vol. 50, No 3, 619-644, September, 2021

We study insider trading behavior surrounding the largest bank bailout in history: Troubled Asset Relief Program (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 Freedom of Information Act 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 School of Economics Working Paper 935