Anticipating the 2007–2008 Financial Crisis: Who Knew What and When Did They Know It?

We examine the ability of three groups of informed market participants to anticipate the 2007–2008 financial crisis. Institutional investors and financial analysts exhibit some awareness of the impending crisis in their preference for nonfinancial stocks over financial stocks. In contrast, corporate...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2015-08, Vol.50 (4), p.647-669
Main Authors: Adebambo, Biljana, Brockman, Paul, Yan, Xuemin (Sterling)
Format: Article
Language:English
Subjects:
Business entities
Common stock
Companies
Economic crises
Economic crisis
Financial advisers
Financial incentives
Hedge funds
Impending
Insider trading
Institutional investments
Investors
Quantitative analysis
Stock analysis
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Summary:We examine the ability of three groups of informed market participants to anticipate the 2007–2008 financial crisis. Institutional investors and financial analysts exhibit some awareness of the impending crisis in their preference for nonfinancial stocks over financial stocks. In contrast, corporate insiders of financial firms appear to be completely unaware of the timing and extent of the financial crisis. Net purchases by managers of financial firms exceed those by managers of nonfinancial firms over the entire 2006–2008 period. Our results add considerable weight to the argument that the financial crisis was more a case of flawed judgment than flawed incentives.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109015000381