University of Michigan Legal Working Paper Series
University of Michigan John M. Olin Center for Law & Economics Working Paper Series
Do Individual Investors Affect Share Price Accuracy? Some Preliminary Evidence
Abstract
Individual investors frequently are labeled as noise traders that distort stock prices. Because accurate share prices are important for economic functioning, the effect of retail investors on markets has significant regulatory implications. This paper, employing a new NYSE retail trading data set and the R2 metric of share price informedness, contributes to the debate by demonstrating that as the proportion of trading and ownership by individual investors increases, the R2 of firms decreases. Though controversial, under the R2 methodology, lower R2's imply more accurate stock prices. The results of an instrumental variable estimation performed suggest that this relationship is a causal one (that is, the proportion of trading and ownership by individual investors causes changes in R2). Thus, if a low R2 indeed signifies share price accuracy, the findings of this study provide evidence that, contrary to the received wisdom, retail investors, as a group, increase share price accuracy.
Subject Area
Banking and Finance, Securities Law
Recommended Citation
Alicia Davis Evans,
"Do Individual Investors Affect Share Price Accuracy? Some Preliminary Evidence"
(July 2008).
University of Michigan Legal Working Paper Series.
University of Michigan John M. Olin Center for Law & Economics Working Paper Series.
Working Paper 75.
http://law.bepress.com/umichlwps/olin/art75
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