Abstract

"Insider Trading and Market Efficiency before the SEC: Evidence from the Teapot Dome Scandal"

Noah MacDonald, Emory University (noah.macdonald@emory.edu)

We use hand-collected New York Stock Exchange data from 1921-1922 to study
insider trading and market efficiency during the Teapot Dome scandal, which centered
around bribes paid by oil moguls to cabinet officials for illegal leases to naval oil reserves.
Although insider trading was legal prior to the establishment of the SEC, we find that
insiders didn’t fully capitalize on their private information to avoid drawing attention
to the shady underpinnings of the leases, leading to less market efficiency than typically
expected under a legal insider trading regime. Despite not fully running up Sinclair’s
share price to its true market value, insiders still stood to profit over $200 million from
their illicit activity. We also find that market makers successfully detected the presence
of insider information and hedged against it by setting wider bid-ask spreads among
oil stocks.