Political Connections, Insider Trading, and Stock Performance

Ever been curious for some statistical data on how political connections influence insider trading and stock performance in highly regulated industries whose regulations are informed by the politics of the moment?

Well, Professors Jagolinzer (U. of Colorado), Larcker (Stanford), Ormazabal (IESE), and Taylor (Penn) sought to do just that, and have released a paper concluding that insider trading from finance industry insiders didn’t predict future stock performance before the financial crisis or during it prior to the launch of the Troubled Asset Relief Program (TARP). However, during the disbursement of TARP funds, the insiders in the financial industry that were well-connected politically were able to make trades that did indicate informativeness of future events, suggesting that regulators indicated which banks would be the survivors and the bank executives invested heavily when the stocks were trading at liquidation value.

I attach parts of the essay that help state their case, and … Read the rest of this article!