Trading by bank insiders before and during the 2007–2008 financial crisis |
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| Institution: | 1. Economics Department, University of Leuven, Belgium;2. Economics Department, University of Arizona, and NBER Research Associate, United States;3. Economics Department, University of North Carolina at Greensboro, and NBER Research Associate, United States;1. Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt am Main, Germany;2. SAFE, GSEFM, Goethe University Frankfurt, Frankfurt am Main, Germany;1. Board of Governors of the Federal Reserve, 20th Street and Constitution Avenue, Washington D.C. 20551, United States;2. Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442, United States;3. Bank for International Settlements, Centralbahnplatz 2, 4051 Basel, Switzerland;1. McDonough School of Business, Georgetown University, United States;2. Sol Price School of Public Policy, University of Southern California, United States;3. Fannie Mae, United States;4. J. Mack Robinson College of Business, Georgia State University, United States;5. Department of Finance and Decision Sciences, Hong Kong Baptist University, Hong Kong |
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| Abstract: | This paper sheds new light on the role bank executives played in the financial crisis. It examines whether they foresaw the poor performance of their own bank by analyzing their insider trading patterns. Insider trading during 2006 predicts stock returns during the crisis: a portfolio strategy based on insider trading information earns a risk-adjusted return of over 40% during the crisis. Further, banks with a high exposure to the housing market and banks with a low exposure exhibit different insider trading patterns starting in mid-2006, when US housing prices first decline: insiders of high-exposure banks are 20% more likely to sell stock than insiders of low-exposure banks. This pattern is more pronounced for CEOs than other insiders. However, insider trading patterns of high- and low-exposure banks do not differ before 2006. Replacing high-exposure banks by too-big-too-fail banks yields similar results. This evidence indicates that insiders of high-exposure and too-big-too-fail banks revised their assessment of their banks’ investments following the reversal in the housing market. |
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