The Information Content of Insider Trades around Government Intervention during the Financial Crisis

This paper examines whether insiders at leading financial institutions anticipated the effect of government intervention during the Financial Crisis on their firms’ share prices. While we find no evidence that insiders anticipated the Crisis, we find considerable evidence that insiders anticipated the recovery and bank bailouts. Specifically we find: (i) that the predictive ability of insider trades for future firm performance is higher during the nine months following the announcement of the Troubled Asset Relief Program (TARP) than at any other time from 2002 to 2010, (ii) that the increase in predictive ability associated with the announcement of TARP is concentrated in firms that previously performed poorly, and (iii) that insider trades at banks five days before the announcement of TARP capital infusions predict the market reaction to the infusion. Overall, our results suggest that once the government announced it would intervene during the Crisis, insiders of financial institutions anticipated the effect of this intervention on share prices.