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Innovation and Entrepreneurship Research

Political Connections and Informed Trading: Evidence from TARP

Akin, Ozlem; Coleman, Nicholas; Fons-Rosen, Christian; Peydro, Jose-Luis (2021). Political Connections and Informed Trading: Evidence from TARP Financial Management, 50 (3), 619-644.

We study insider trading behavior surrounding the largest bank bailout in history: Troubled Asset Relief Program (TARP). In politically connected banks, insider buying during the pre-TARP period is associated with increases in abnormal returns around bank-specific TARP announcement; for unconnected banks, trading and returns are uncorrelated. Results hold across insiders within the same bank and are stronger for finance-related government connections. Through a Freedom of Information Act request, we obtained the previously undisclosed TARP funds requested; the ratio of received to requested funds correlates both with abnormal returns and insider buying behavior in connected banks.

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