Trading by bank insiders before and during the 2007–2008 financial crisis

Cziraki, Peter

doi:10.1016/j.jfi.2017.08.002

Cited by 35 publications

(35 citation statements)

References 49 publications

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“…In our specifications, we assume that none of the managers anticipated a high probability of failure as of the end of 2006, consistent with Fahlenbrach and Stulz () who show that bank CEOs did not sell stock in anticipation of the crisis. However, very recent studies show that some managers might have already adjusted their holdings as early as mid‐2006 when housing prices started to decline (Cziraki ). We therefore rerun all regressions with the exogenous variables measured in the fixed periods of 2006:Q1, 2006:Q2, and 2006:Q3.…”

mentioning

confidence: 99%

The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis

Berger¹,

Imbierowicz²,

Rauch³

2016

J of Money Credit Banking

233

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This paper analyzes the roles of corporate governance in bank defaults during the recent financial crisis. We investigate the impact of bank ownership and management structures on the probability of default of US commercial banks. Our results show that defaults are strongly influenced by a bank's ownership structure: high shareholdings of lower-level management, such as vice presidents, increase default risk significantly. In contrast, shareholdings of outside directors and chief officers (managers with a "chief officer" position, such as the CEO, CFO, etc.) do not have a direct impact on the probability of failure. These findings suggest that high stakes in the bank induce lower-level management, which has direct influences on the bank's daily operations, to take high risks, which may eventually result in bank default. Our results further show that the probability of default specifically increases when incentives of chief officers and lower-level management are aligned. Some accounting variables, such as capital, earnings, and non-performing loans, also help predict bank default. However, other potential stability indicators, such as the management structure of the bank, indicators of market competition, subprime mortgage risks, state economic conditions, and regulatory influences, appear to be less decisive factors in predicting bank default. JEL Codes: G21, G28, G32, G34

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confidence: 99%

The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis

Berger¹,

Imbierowicz²,

Rauch³

2016

J of Money Credit Banking

233

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“…In short, there is no strong support for a front-running hypothesis. We can only surmise that operations in these industries are far too complex for short traders to interpret as argued by Cziraki (2017) and Adams et al (2012), or that political sensitivity and the clear and rapid reporting requirement inhibits negative trading.…”

Section: Industry Analysismentioning

confidence: 96%

Insider sales vs. short selling: Negative information trading in Australia

Hodgson

Lim

2018

Pacific-Basin Finance Journal

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In contrast to U.S. studies, we show that Australian short sellers do not front-run and profit after insider sales. Results are robust to conditional trading classified by book-to-market, intangible ratios, industry and multiple factor analysis. A combination of insider sales and short selling provides a contrarian signal that dampens prior overpricing, but is not associated with subsequent abnormal returns. We contend that the commercial and legal environment in Australia, together with the daily reporting of short sales, plays a significant role in restraining short selling profitability. Our results contradict front-running by short sellers in the U.S., that is explained by a business environment that induces the leakage of pre-traded negative information by corporate insiders. Overall, we highlight how information flow direction and profitability can be affected by different country legal and business cultures.

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“…Bebchuk et al (2010) provide a case study of compensation in Bear Stearns and Lehman Brothers during 2000-2008 and document that both the CEO and top-five executives in these banks significantly sold their own shares during this period. 13 A paper close to ours is Cziraki (2018), which analyses insider trading in US banks around the crisis period. This paper finds no differential effects in insider trading in 2005 and bank returns in the crisis, while we find that insider trading before the peak and reversal of real estate prices predicts the crosssection of bank returns during the crisis.…”

Section: Introductionmentioning

confidence: 92%

“…14 For example, we have double the number of banks. Also, Cziraki (2018) divides insiders into three subcategories such as officers, independent directors, and CEOs. But we focus on top-five executives' trading, which includes the CEO and other top-executives as well.…”

Section: Introductionmentioning

confidence: 99%

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Anticipating the Financial Crisis: Evidence from Insider Trading in Banks

2016

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Banking crises are recurrent phenomena, often induced by excessive bank risk-taking, which may be due to behavioural reasons (over-optimistic banks neglecting risks) and to conflicts of interest between bank shareholders/managers and debtholders/taxpayers (banks exploiting moral hazard). We test whether US banks' stock returns in the 2007-08 financial crisis are associated with bank insiders' sales of their own bank's shares in the period prior to 2006Q2 (the peak and reversal in real estate prices). We find that top-five executives' sales of shares predict bank performance during the crisis. Interestingly, effects are insignificant for the sales of independent directors and other officers. Moreover, the top-five executives' impact is stronger for banks with higher exposure to the real estate bubble, where a one standard deviation increase of insider sales is associated with a 13.33 percentage point drop in stock returns during the crisis period. Finally, even though bankers in riskier banks sold more shares (furthering their own interests), they did not change their bank's policies, e.g. by reducing bank-level exposure to real estate. The informational content of bank insider trading before the crisis suggests that insiders knew that their banks were taking excessive risks, which has important implications for theory, public policy, and the understanding of crises, as well as a supervisory tool for early warning signals. JEL Codes: G01, G02, G21, G28.

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Trading by bank insiders before and during the 2007–2008 financial crisis

Cited by 35 publications

References 49 publications

The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis

The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis

Insider sales vs. short selling: Negative information trading in Australia

Anticipating the Financial Crisis: Evidence from Insider Trading in Banks

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