DP11302 Anticipating the Financial Crisis: Evidence from Insider Trading in Banks

Author(s):	Ozlem Akin, Jose Marin, José Luis Peydró
Publication Date:	May 2016
Date Revised:	July 2020
Keyword(s):	agency problems in firms, Banking, financial crises, insider trading, risk-taking
JEL(s):	G01, G02, G21, G28
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=11302

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.