Finance

Informed Trading through the Accounts of Children

Professor Henk Berkman, Business School, University of Auckland New Zealand

11th Sep 2012  11:15 am - Room 214/215, H69 - Economics and Business Building

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.

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