Political Connections: Evidence From Insider Trading Around TARP
Ozlem Akin received her PhD degree in Finance from Universitat Pompeu Fabra in 2013 and is currently working as an Assistant Professor at Ozyegin University. Her research interests include corporate finance, banking and financial crises. Dr. Akın teaches courses at BS and MS levels on corporate finance and financial intermediation.
We exploit the 2008-2010 TARP bank bailouts after Lehman’s failure to test for private information leakages from banking regulators to top corporate bank executives using insider trading data and information on political connections. In politically-connected banks, buying during the pre-TARP period is associated with increases in abnormal returns around TARP. For unconnected banks, insider trading and returns are uncorrelated. Results hold when comparing connected to unconnected executives within the same bank and are driven by political connections to financial branches of government. Through a FOIA request we obtained the previously unknown TARP funds requested by each bank. The ratio of requested to received funds strongly correlates with abnormal returns and is also a predictor of buying behavior by connected banks.