Informed Trading Through the Accounts of Children
University of Auckland - Business School
Paul D. Koch
University of Kansas - Finance Area
P. Joakim Westerholm
University of Sydney Business School; Financial Research Network (FIRN)
June 5, 2012
Journal of Finance, Forthcoming
This study argues that a high proportion of trading through underaged accounts is likely to be controlled by informed guardians seeking to share the benefits of their information advantage with young children, or camouflaging their potentially illegal trades. Consistent with this conjecture, we find that the guardians behind underaged accounts are very 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, as proxied by BABYPIN.
Number of Pages in PDF File: 81
Keywords: Individual investors, informed trading, insider trading, information asymmetry, market efficiency, PIN
JEL Classification: G14, G19
Date posted: June 7, 2012 ; Last revised: February 20, 2013
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