Informed Trading Through the Accounts of Children

81 Pages Posted: 7 Jun 2012 Last revised: 20 Feb 2013

Henk Berkman

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)

Date Written: June 5, 2012

Abstract

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.

Keywords: Individual investors, informed trading, insider trading, information asymmetry, market efficiency, PIN

JEL Classification: G14, G19

Suggested Citation

Berkman, Henk and Koch, Paul D. and Westerholm, P. Joakim, Informed Trading Through the Accounts of Children (June 5, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2078593

Henk Berkman (Contact Author)

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Paul D. Koch

University of Kansas - Finance Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

P. Joakim Westerholm

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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