Political Connections and Insider Trading

Abstract

Politically connected insiders, especially senior officers who hold a director position, are more likely sell shares prior to negative abnormal returns. Politically connected insiders are also more likely to engage in other risky behavior: trading prior and closer to major corporate events, trading during periods that overlap with traditional blackout periods, and missing SEC timely reporting requirements. These finding are consistent with insiders perceiving their political connections as protection against SEC enforcement. Consistent with political connections influencing insider trading behavior, the relation is stronger for connections with Senators, who have a greater impact over the SEC than other members of the Congress. Connections with a particular political party have a greater effect on insider trading when the party controls both the House and the Senate.