Informed Trading through the Accounts of Children

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. THIS STUDY INTRODUCES A novel measure of the probability of information-based trading in a stock, namely, BABYPIN, the proportion of total trading through the accounts of underaged investors. We begin by empirically validating this measure by showing that underaged accountholders are extremely successful at picking stocks, especially when they trade just before large price changes, major earnings announcements, and takeover announcements. We next show that BABYPIN is priced in the cross section of stock returns, consistent with Easley and O’Hara (2004). There are two reasons to expect a high proportion of informed trading through underaged investor accounts. First, guardians who open accounts and trade on behalf of young children are likely to be above-average investors. We expect these individuals to have more wealth (to bestow on offspring) and to be more successful at investing, possibly due to superior cognitive skills or ∗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. DOI: 10.1111/jofi.12043