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 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.