Informed Trading from Tax Havens

Abstract

Cross-border trades from tax havens provide significant information for short-term future stock returns. Using a unique account-level dataset that includes investors' country of origin, we find that three-day portfolio returns based on net buys from tax havens amount to 0.47% per day for institutional trades and 0.33% per day for individual trades. Profitable institutional trades tend to originate from jurisdictions with a high corporate tax haven index and involve accounts trading multiple stocks. In contrast, profitable individual trades come from jurisdictions with high financial secrecy and involve accounts trading only one stock. Additionally, tax haven individual accounts are particularly profitable in stocks with poor corporate governance. Overall, our results suggest that institutional trades in tax havens reflect superior stock-picking ability, while individual trades are consistent with the use of insider information.

Keywords: Informed Trading, Anonymity, Stock Picking Ability, Insider Information, Tax Haven