The Credit Crunch and Insider Trading

30 Pages Posted: 8 Apr 2014

See all articles by Manouchehr Tavakoli

Manouchehr Tavakoli

University of St. Andrews

David G. McMillan

University of Stirling

Phillip J. McKnight

University of St. Andrews - School of Management

Date Written: May 2014

Abstract

This paper examines the behaviour and information content of insiders’ trades before and after the credit crunch and, in particular, examines the extent to which some insiders anticipated the market crash and took action to protect their positions. In part, the market crash was brought about by the excessive borrowing of financial institutions. Our results point to the view that a number of insiders, primarily directors, were aware that the excessive use of leverage by financial institutions would ultimately have a detrimental impact on the economy. These insiders acted by selling their shares prior to the market collapse and subsequently buying them back at a lower price. Supportive evidence for the above view is provided through both graphical evidence and regression analysis. In particular, we demonstrate a link between insider behaviour and the rapid decline in share values. Further evidence is also provided of a link between insider behaviour and future risk as measured by the CDS premium. In short, we argue that this selling was not motivated by liquidity or other contrarian strategies but was a result of understanding how higher levels of leverage and excessive trading in new risky derivatives could lead to higher levels of risk, an insight possessed only by a subset of insiders.

Keywords: Credit crunch, insider trading, market efficiency

Suggested Citation

Tavakoli, Manouchehr and McMillan, David G. and McKnight, Phillip J., The Credit Crunch and Insider Trading (May 2014). Financial Markets, Institutions & Instruments, Vol. 23, Issue 2, pp. 71-100, 2014, Available at SSRN: https://ssrn.com/abstract=2422142 or http://dx.doi.org/10.1111/fmii.12015

Manouchehr Tavakoli (Contact Author)

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

David G. McMillan

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

Phillip J. McKnight

University of St. Andrews - School of Management ( email )

The Gateway
Gateway
St. Andrews, Fife KY16 9SS
United Kingdom

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