Beware of Children Trading

Volume 13, Number 3, 2015
Henk Berkman, Paul D. Koch and P. Joakim Westerholm

Guardians behind underaged accounts are successful at picking stocks. These informed traders 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) is an effective proxy for firm-specific information asymmetry. Consistent with this claim, we show that investors demand a higher return for holding stocks with a higher probability of informed trading as proxied by BABYPIN.