Did Real Estate Professionals Anticipate the 2007-2008 Financial Crisis? Evidence from Insider Trading in the REITs

Abstract

This research examines whether real estate professionals detected the property bubble and foresaw the consequent financial crisis of [2007][2008]. By analysing the insider trading activities within REITs from 1996 to 2010, we find that REIT insiders reduced their holdings significantly during the real estate boom period as early as 2004, before the financial crisis.Difference-in-difference analysis reveals that REIT insiders cashed out their positions more aggressively than insiders in real estate and construction firms. The findings support the informed trader hypothesis that managers and employees in REITs anticipated the burst of the real estate bubble and the imminent financial crisis, and shifted their wealth away from the real estate market to avoid potential losses. We find no evidence to support the biased belief hypothesis (Cheng et al., 2014) that REIT insiders were over-optimistic during the real estate boom period or that their inside trading behaviour was affected by local market performance.

Disaster response: The COVID-19 pandemic and insider trading around the world

“…Interestingly, the COVID-19 × COVID_RISK coefficient is double that of PRE_COVID-19 × COVID_RISK (−0.812 vs. −0.497, respectively), suggesting that selling by insiders in firms that are more exposed to COVID-19 is stronger during the 30 days after the first confirmed COVID-19 case in the US. These findings are consistent with the conjecture that risk-averse corporate insiders tend to hedge when firm risk exposure increases ( Anderson & Puleo, 2020 ; Cheng & Lo, 2006 ; Shen, Hui, & Fan, 2021 ; Shen, Wang, & Zhou, 2021 ), further confirming our primary finding of insiders' selling during the COVID-19 outbreaks as a firm's COVID-19 risk increases.…”

“… Song and Wang (2020) suggest that the trading of gray institutions before a crisis predicted banks' abnormal returns around the Lehman bankruptcy. Shen, Hui, and Fan (2021) show that REIT insiders reduce their holdings significantly before a financial crisis. Akin, Marín, and Peydró (2020) indicate that bank insiders' sales can predict the cross-section of bank returns during the 2007–2008 crisis.…”

How does Covid-19 affect global equity markets?

“…Only insiders may anticipate the outbreak of a crisis and take action before the crisis occurs. Shen et al ( 2021 ) find that REIT insiders reduced their holdings significantly during the real estate boom period as early as 2004, before the global financial crisis in 2008. This result supports the informed trader hypothesis that managers and employees in REITs anticipated the burst of the real estate bubble and the imminent financial crisis, and shifted their wealth away from the real estate market to avoid potential losses.…”

The Effect of Access to the Public Debt Market on Corporate Financing Decisions: The Case of REITs

“…The annual firm data for these REITs were obtained for the period 1980 to 2016. The REIT and property types were gathered from the CRSP/Ziman real estate database (Glascock and Lu-Andrews [36]; Ling and Naranjo [37]; Shen [38]; Shen, Hui and Fan [39]; Shen, Hui and Fan [40]). The sample contained 523 REITs in total including 391 equity, 98 mortgage, and 34 hybrid REITs.…”