Discussion Paper Details

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Title: Anticipating the Financial Crisis: Evidence from Insider Trading in Banks

Author(s): Ozlem Akin, Jose Marin and José Luis Peydró

Publication Date: May 2016

Keyword(s): agency problems in firms, Banking, financial crises, insider trading and risk-taking

Programme Area(s): Financial Economics

Abstract: Banking crises are recurrent phenomena, often induced by ex-ante 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' sale 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' ex-ante sales of shares predicts the cross-section of banks returns during the crisis; interestingly, effects are insignificant for independent directors' and other officers' sale of shares. Moreover, the top-five executives' significant impact is stronger for banks with higher ex-ante 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 risk-taking in their banks, which has important implications for theory, public policy and the understanding of crises.

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Bibliographic Reference

Akin, O, Marin, J and Peydró, J. 2016. 'Anticipating the Financial Crisis: Evidence from Insider Trading in Banks'. London, Centre for Economic Policy Research.