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Trading by bank insiders before and during the 2007–2008 financial crisis

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  • Cziraki, Peter

Abstract

This paper sheds new light on the role bank executives played in the financial crisis. It examines whether they foresaw the poor performance of their own bank by analyzing their insider trading patterns. Insider trading during 2006 predicts stock returns during the crisis: a portfolio strategy based on insider trading information earns a risk-adjusted return of over 40% during the crisis. Further, banks with a high exposure to the housing market and banks with a low exposure exhibit different insider trading patterns starting in mid-2006, when US housing prices first decline: insiders of high-exposure banks are 20% more likely to sell stock than insiders of low-exposure banks. This pattern is more pronounced for CEOs than other insiders. However, insider trading patterns of high- and low-exposure banks do not differ before 2006. Replacing high-exposure banks by too-big-too-fail banks yields similar results. This evidence indicates that insiders of high-exposure and too-big-too-fail banks revised their assessment of their banks’ investments following the reversal in the housing market.

Suggested Citation

  • Cziraki, Peter, 2018. "Trading by bank insiders before and during the 2007–2008 financial crisis," Journal of Financial Intermediation, Elsevier, vol. 33(C), pages 58-82.
  • Handle: RePEc:eee:jfinin:v:33:y:2018:i:c:p:58-82
    DOI: 10.1016/j.jfi.2017.08.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Insider trading; Financial crisis; Executive compensation;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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