David F. Larcker is Professor of Accounting at Stanford Graduate School of Business (Corresponding Author); Daniel J. Taylor is Harold C. Stott Assistant Professor of Accounting at The Wharton School of the University of Pennsylvania. This post is based on a recent paper authored by Professor Larcker; Professor Taylor; Alan D. Jagolinzer, Associate Professor of Accounting at University of Colorado Leeds School of Business; and Gaizka Ormazabal, Assistant Professor of Accounting and Control at University of Navarra, IESE Business School.
Our paper examines the relation between political connections and informed trading by corporate insiders within the context of the 2007-2009 Financial Crisis. The unprecedented magnitude of government intervention during the Financial Crisis, the substantial impact of the intervention on firm value, and the political nature of the intervention provide a powerful setting to examine the relation between political connections and informed trading. It is now well known that deliberations on government intervention largely took place in private meetings between government officials and insiders at leading financial institutions; details regarding the application and qualification process for funds from the Troubled Asset Relief Program (TARP) were not publicly disclosed; and political connections appear to have played a role in the allocation of these funds (e.g., Duchin and Sosyura, 2012). Thus, politically connected insiders at leading financial institutions were in a position to be disproportionately privately informed about the scope of government intervention, how this intervention would affect their firm, and details of any forthcoming TARP monies.
