Anticipating the financial crisis: evidence from insider trading in banks

Akin, Ozlem; Marín, José M.; Peydró, José-Luis

Anticipating the financial crisis: evidence from insider trading in banks

Citation

Akin, O, Marín, J, Peydró, J. Anticipating the financial crisis: evidence from insider trading in banks. 2019. handle: http://hdl.handle.net/10230/37099

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Abstract

Banking crises are recurrent phenomena, often induced by excessive bank risk-taking, which may be due to behavioral reasons (over-optimistic banks neglecting risks) and to agency problems between bank shareholders with debt-holders and taxpayers (banks understand high risk-taking). We test whether US banks’ stock returns in the 2007-08 crisis are related to bank insiders’ sales of their own bank shares in the period prior to 2006:Q2 (the peak and reversal in real estate prices). We find that top-five executives’ sales of shares predict the cross-section of banks returns during the crisis; interestingly, effects are insignificant for independent directors’ and other officers’ sales. Moreover, the top-five executives’ significant impact is stronger for banks with higher exposure to the real estate bubble, where an increase of one standard deviation of insider sales is associated with a 13.33 percentage point drop in stock returns during the crisis period. The informational content of bank insider trading before the crisis suggests that insiders understood the excessive risk-taking in their banks, which has important implications for theory, public policy and the understanding of crises.