Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/221755 
Year of Publication: 
2020
Citation: 
[Journal:] Economic Policy [ISSN:] 1468-0327 [Volume:] 35 [Issue:] 102 [Publisher:] Oxford University Press [Place:] Oxford [Year:] 2020 [Pages:] 213-267
Publisher: 
Oxford University Press, Oxford
Abstract: 
Banking crises are recurrent phenomena, often induced by 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’ sales 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’ sales of shares predict the cross-section of banks returns during the crisis; interestingly, effects are insignificant for independent directors’ and other officers’ sales. Moreover, the top-five executives’ significant impact is stronger for banks with higher 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 excessive risk-taking in their banks, which has important implications for theory, public policy and the understanding of crises.
Subjects: 
financial crises
insider trading
banking
risk-taking
problems in firms
JEL: 
G01
G02
G21
G28
Published Version’s DOI: 
Document Type: 
Article
Document Version: 
Manuscript Version (Preprint)
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