Political Connections and the Informativeness of Insider Trades

This paper examines the relation between political connections and informed trading by corporate insiders in the context of government intervention during the Financial Crisis. Consistent with politically connected insiders extracting rents from shareholders, we find strong evidence of a relation between political connections and informed trading by corporate insiders. We find that the relation is strongest during the period in which TARP funds were disbursed and strongest among the trades of politically connected insiders at TARP recipients. Examining the trades of politically connected insiders around the announcements of TARP infusions, we find evidence of significant trading thirty days in advance of the announcement, and that these trades predict the market reaction to the announcement. Notably, we find these relations are present only for the trades of politically connected insiders as it relates to infusion announcements. Similar relations are not observed among insiders without political connections and are not observed on non-announcement dates. Collectively, our results suggest that politically connected insiders had an information advantage during the Crisis and traded to exploit this advantage.