Skip to main content
SpringerLink
Log in

Bank bailouts and corporate insider trading during the financial crisis of 2007–2009

  • Original Research
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

Jagolinzer et al. (The information content of insider trades around government intervention during the financial crisis. Working paper, 2014) examine insider trading at banks that were bailed out by the U.S. taxpayers. They provide evidence that insiders of bailed-out banks profitably purchased their banks’ shares over a 9 month period after the Troubled Assets Relief Program (TARP) was announced in October 2008. They find that the purchases were profitable for up to 12 months after the purchases. However, Liu et al. (J Bank Finance 37:5048–5061, 2013) find that shareholder gains at the bailed out banks occurred only after the banks paid back the TARP funds, which in most cases occurred after 2010. In this paper we extend Jagolinzer et al.’s (2014) analysis to financial institutions that did not receive TARP funding as well as to non-financial firms. We find that insiders of the non-TARP financial and the non-financial firms traded their shares profitably after the TARP program was announced. Insider share purchases at these firms were highly profitable for up to 12 months after the purchases. However, insider purchases at the bailed-out banks were slightly profitable only for a month after the purchases, after which the shares that were bought declined in value. Our results for the TARP banks do not corroborate Jagolinzer et al.’s (2014) results, but are consistent with the evidence in Liu et al. (2013) and several other papers that examine the wealth effects of TARP program announcements and fund repayments.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Also see Cheng et al. (2014).

  2. Bhagat and Bolton (2014) examine compensation plans in 14 largest U.S. financial institutions and reach similar conclusions. Bhagat and Bolton (2014) argue that their results do not support Fahlenbach and Stultz’s (2011) conclusion that the financial crisis resulted from “unforeseen risk” that U.S. financial institutions undertook in the years leading up to the crisis.

  3. Also see Nguyen and Enomoto (2009), and Jagolinzer et al. (2014) for details about the TARP program and related literature review.

  4. Jagolinzer et al. (2014) do not examine insider trading at non-TARP financial firms or at non-financial firms. They focus exclusively on insider trading in 251 TARP banks.

  5. Jagolinzer et al. (2014) also report that some of their results were driven by insider trading in a small number banks in their sample (less than 10% of their sample of banks, p. 33). Since they do not provide any details about their sample of TARP-banks, it is impossible to determine whether the main results in their paper were also heavily influenced by the presence of a few outliers.

  6. Most of the trades were reported on form 4. Following Cohen et al. (2012) we retain only trades that were reported on form 4 in our sample.

  7. Jagolinzer et al. (2014) begin their study period in 2002 to have a fairly long time-series of observations before the crisis, and compare insider trading in the TARP-banks during this long time period to trading immediately before and during the crisis. The sample period in their study is 2002–2010. In this paper we examine insider trading in the TARP-banks during the same time period using their methodology, and extend the analysis to insider trading in non-TARP financial firms and non-financial firms.

  8. www.treasury.gov/initiatives/financial-stability/TARP-Programs/Pages/default.aspx.

  9. Our sample size decreases to 224 TARP banks after matching with data from TFN, CRSP, and Compustat. Our sample size of TARP banks is similar to the sample size that can be found in other studies. For example, Jagolinzer et al (2014) have a sample of 251 TARP banks. Bayazitova and Shivdasani (2012), Ng et al. (2011), and Farruggio et al. (2013) have sample sizes of 286 banks, 186 banks, and 125 banks respectively.

  10. Seyhun (1990), Rozeff and Zaman (1998), Piotroski and Roulstone (2005), and Gangopadhyay et al. (2014) use insider purchase ratios (PR) to measure insider trading. Our NPR and SPR measures are closely related to PR used in these papers. Lakonishok and Lee (2001) use NPR to measure insider trading. Jagolinzer et al. (2014) use two variables that are identical to SPR and Buyer. Cziraki (2016) uses a variable that is similar to Buyer [which is defined after Eq. (2)].

  11. Liu et al. (2013) report that buy-and-hold returns (BH) for shareholders of TARP-recipient bank were statistically indistinguishable from zero in the quarter after capital infusions (see Table 6, p. 5057). BH returns for TARP banks were also statistically indistinguishable from a control group of non-TARP financial firms in the quarter after the capital injections. TARP bank shareholders earned an average BH return of 14.02% in the quarter after actual repayment of the TARP funds. Veronesi and Zingales (2010) and Farruggio et al. (2013) report finding negative wealth effects for common shareholders of TARP-recipient banks during a 5-day window around TARP announcement date (October 14, 2008). These wealth effects were small and economically insignificant. Bayazotiva and Shivdashani (2012) find large wealth gains on days − 1 and 0 relative to the TARP announcement date, but no wealth effects when the banks actually received funding. Ng et al. (2011) find that TARP- banks underperformed non-TARP banks during October 2008–March 2009, but outperformed non-TARP banks during the remainder of 2009. All of these papers examine wealth effects for all shareholders of these banks, whereas we report results for the actual insider trades in Table 1. Overall, our results are consistent with the results reported in this literature.

  12. Insider purchases at the non-TARP financials during the bailout period were profitable before market adjustments but not after adjusting for market returns.

  13. We replicated the all results with market-adjusted returns. The conclusions were identical. To conserve space, we do not report the results from the multivariate regressions with the market-adjusted returns in this paper. However, the results are available upon request.

  14. The regression equation is similar to Eq. (2) in Jagolinzer et al. (2014). The only difference is that Jagolinzer et al. (2014) rank the control variables (size, BM, and past returns) into quintiles each month and scale the quintile ranks from 0 to 1. They report (see footnote 15, page 20) that their inferences remain unchanged when they use the raw values of the control variables instead of the scaled quintile ranks. We replicate our results that we report in Tables 3, 4 and 5 using scaled quintile values of the control variables as in Jagolinzer et al. (2014). Our inferences remain the same whether we use raw values or scaled quintile ranks of the control variables.

  15. Also see Liu et al. (2013), Table 7, p. 5057.

  16. See Akhigbe et al. (2016) for a review of the Dodd–Frank Act.

  17. We thank a reviewer for suggesting this to us.

References

  • Adebambo B, Brockman P, Yan X (2015) Anticipating the 2007–2008 financial crisis: who knew what and when did they know it? J Financ Quant Anal 50:647–669

    Article  Google Scholar 

  • Akhigbe A, Martin AD, Whyte AM (2016) Dodd–Frank and risk in the financial services industry. Rev Quant Financ Account 47:395–415

    Article  Google Scholar 

  • Bayazitova D, Shivdasani A (2012) Assessing TARP. Rev Financ Stud 25:377–407

    Article  Google Scholar 

  • Bebchuk LA, Cohen A, Spamann H (2010) The wages of failure: executive compensation at Bear Stearns and Lehman 2000–2008. Yale J Regul 27:257–282

    Google Scholar 

  • Bhagat S, Bolton B (2014) Financial crisis and bank executive incentive compensation. J Corp Finance 25:313–341

    Article  Google Scholar 

  • Brunnermeier MK (2009) Decifering the liquidity and credit crunch 2007–2008. J Econ Perspect 23:77–100

    Article  Google Scholar 

  • Cheng IH, Raina S, Xiong W (2014) Wall Street and the housing bubble. Am Econ Rev 104:2797–2829

    Article  Google Scholar 

  • Clarke J, Dunbar C, Kahle KM (2001) Long-run performance and insider trading in completed and canceled seasoned equity offerings. J Financ Quant Anal 36:415–430

    Article  Google Scholar 

  • Cohen L, Malloy C, Pomorski L (2012) Decoding inside information. J Finance 67:1009–1043

    Article  Google Scholar 

  • Cziraki P (2016) Trading by bank insiders before and during the 2007–2008 financial crisis. Working paper, University of Toronto

  • Fahlenbrach R, Stulz RM (2011) Bank CEO incentives and the credit crisis. J Financ Econ 99:11–26

    Article  Google Scholar 

  • Fama EF, French KR (1993) Common risk factors in the returns on stocks and bonds. J Financ Econ 33:3–56

    Article  Google Scholar 

  • Fama EF, French KR (1996) Multifactor explanations of asset pricing anomalies. J Finance 51:131–155

    Google Scholar 

  • Farruggio C, Michalak T, Uhde A (2013) The light and dark side of TARP. J Bank Finance 37:2586–2604

    Article  Google Scholar 

  • Fidrmuc JP, Goergen M, Renneboog L (2006) Insider trading, news releases, and ownership concentration. J Finance 61:2931–2974

    Article  Google Scholar 

  • Gangopadhyay P, Yook KC, Shin Y (2014) Insider trading and firm-specific return volatility. Rev Quant Financ Account 43:1–19

    Article  Google Scholar 

  • Givoly D, Palmon D (1985) Insider trading and the exploitation of inside information: some empirical evidence. J Bus 58:69–87

    Article  Google Scholar 

  • Jaffe JF (1974) Special information and insider trading. J Bus 47:410–428

    Article  Google Scholar 

  • Jagolinzer AD, Larcker DF, Ormazabal G, Taylor DJ (2014) The information content of insider trades around government intervention during the financial crisis. Working paper

  • Jeng L, Metric A, Zeckhauser R (2003) Estimating the returns to insider trading: a performance-evaluation perspective. Rev Econ Stat 85:453–471

    Article  Google Scholar 

  • Jenter D (2005) Market timing and managerial portfolio decisions. J Finance 60:1903–1949

    Article  Google Scholar 

  • Ke B, Huddart S, Petroni K (2003) What insiders know about future earnings and how they use it: evidence from insider trades. J Account Econ 35:315–346

    Article  Google Scholar 

  • Lakonishok J, Lee I (2001) Are insider trades informative? Rev Financ Stud 14:79–111

    Article  Google Scholar 

  • Lakonishok J, Shleifer A, Vishny RW (1994) Contrarian investment, extrapolation, and risk. J Finance 49:1541–1578

    Article  Google Scholar 

  • Liu W, Kolari JW, Tippens TK, Fraser DR (2013) Did capital infusions enhance bank recovery from the great recession? J Bank Finance 37:5048–5061

    Article  Google Scholar 

  • Mishkin FS (2011) Over the cliff: from the subprime to the global financial crisis. J Econ Perspect 25:49–70

    Article  Google Scholar 

  • Ng J, Vasvari F, Wittenberg-Moerman R (2011) The impact of TARP’s capital purchase program on the stock market valuation of participating banks. Working paper, University of Chicago

  • Nguyen AP, Enomoto CE (2009) The Troubled Asset Relief Program (TARP) and the financial crisis of 2007–2008. J Bus Econ Res 7:91–106

    Google Scholar 

  • Piotroski JD, Roulstone DT (2005) Do insider trades reflect both contrarian beliefs and superior knowledge about future cash flow realizations? J Account Econ 39:55–81

    Article  Google Scholar 

  • Rozeff MS, Zaman MA (1998) Overreaction and insider trading: evidence from growth and value portfolios. J Finance 53:701–716

    Article  Google Scholar 

  • Seyhun N (1986) Insiders’ profits, costs of trading, and market efficiency. J Financ Econ 16:189–212

    Article  Google Scholar 

  • Seyhun N (1990) Overreaction or fundamentals: some lessons from insiders’ response to the market crash of 1987. J Finance 45:1363–1388

    Article  Google Scholar 

  • Seyhun N (1992) Why does aggregate insider trading predict future stock returns? Q J Econ 107:1303–1331

    Article  Google Scholar 

  • Veronesi P, Zingales L (2010) Paulson’s gift. J Financ Econ 97:339–368

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Finance, Insurance, and Real Estate, Herberger Business School, St. Cloud State University, St. Cloud, MN, 56301, USA

    Partha Gangopadhyay & Joseph D. Haley

  2. The Johns Hopkins Carey Business School, 100 International Drive, Baltimore, MD, 21202, USA

    Ken C. Yook

Authors
  1. Partha Gangopadhyay
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ken C. Yook
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Joseph D. Haley
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Partha Gangopadhyay.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Gangopadhyay, P., Yook, K.C. & Haley, J.D. Bank bailouts and corporate insider trading during the financial crisis of 2007–2009. Rev Quant Finan Acc 52, 35–83 (2019). https://doi.org/10.1007/s11156-018-0702-0

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-018-0702-0

Keywords

JEL Classification

Search

Navigation