Informed Trading through the Accounts of Children

Authors

  • HENK BERKMAN,

  • PAUL D. KOCH,

  • P. JOAKIM WESTERHOLM

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    • Henk Berkman is at the University of Auckland Business School. Paul Koch is at the University of Kansas School of Business. Joakim Westerholm is at the University of Sydney Business School. We acknowledge the helpful comments of Ferhat Akbas, Chris Anderson, Audra Boone, Jennifer Conrad, Bob DeYoung, Doug Foster, Campbell Harvey (Editor), Scott Hein, Felix Meschke, Kelly Welch, Jide Wintoki, an anonymous referee, and Associate Editor, and seminar participants at the University of Auckland, the University of Kansas, the conferences of the Financial Management Association, the Asian Financial Management Association, the Southern Finance Association, and the Australian National University Microstructure Meeting. We also appreciate the excellent research assistance of Evan Richardson and Suzanna Emelio.


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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