Informed Trading through the Accounts of Children

  • Author(s): HENK BERKMAN, PAUL D. KOCH, P. JOAKIM WESTERHOLM
  • Published: Jan 07, 2014
  • Pages: 363-404
  • DOI: 10.1111/jofi.12043

ABSTRACT

This study shows that the guardians behind underaged accounts are successful at picking stocks. Moreover, they tend to channel their best trades through the accounts of children, especially when they trade just before major earnings announcements, large price changes, and takeover announcements. Building on these results, we argue that the proportion of total trading activity through underaged accounts (labeled BABYPIN) should serve as an effective proxy for the probability of information trading in a stock. Consistent with this claim, we show that investors demand a higher return for holding stocks with a greater likelihood of private information, proxied by BABYPIN.

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