Political connections and informed trading: evidence from TARP

Abstract

We study insider trading behavior surrounding the largest bank bailout in history: 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 FOIA 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.