The stimulus package came together very quickly in a chaotic last few weeks. The package required input from corporate insiders seeking assistance for their companies and industries. During the course of lobbying, select corporate insiders would become aware of material, non-public information.
Research regarding the 2007-2009 financial crisis indicates that corporate insiders with political connections had significantly higher investment returns than their counterparts without political connections in the month following the TARP infusions.
Consequently, we may see increased scrutiny of trading by corporate insiders following the $2 trillion stimulus package.
The research, from scholars at the Wharton School, Stanford University, University of Cambridge and IESE Business School, found insider trading profitability jumped dramatically during the 2007-2009 global financial crisis and subsequent government bailout. “Anytime the government picks winner and losers, there is a greater opportunity for insider trading by connected individuals,” said Daniel Taylor... The study... found evidence of abnormal trading by politically connected insiders 30 days ahead of the TARP infusions, which either boosted or hit company share prices, depending on the situation. During the period over which TARP funds were disbursed, the one-month-ahead future returns between purchases and sales by insiders with political connections was 8.89% versus 2.81% for those without, according to the study. It also identified a pronounced increase in the trading activity of politically connected insiders 30 days prior to the TARP announcement.
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