Political Connections and Insider Trading

Abstract

This paper investigates whether political connections affect individuals’ propensity to engage in illegal activities in financial markets. We use the French 2007 presidential election as a plausibly exogenous change in the value of political connections in a difference-in-differences research design. Specifically, we examine the behavior of directors of publicly listed companies that are connected to the future President through campaign donations or direct friendships, relative to that of other non-connected directors before and after the election. We find that after the election, insider purchases by connected directors experience larger abnormal returns and that connected directors are more likely not to comply with trading disclosure requirements and to trade closer to major corporate events.

Keywords: Insider Trading, Politics of Financial Markets, Securities Regulation

JEL Classification: G14, G18, G38, K22