University of Michigan Legal Working Paper Series
Working Papers 2003-2010
Do Individual Investors Affect Share Price Accuracy? Some Preliminary Evidence
Abstract
A common belief is that individual investors are noise traders that distort stock prices. Because accurate share prices are important for economic functioning, the market effect of retail investors 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 by individual investors increases, the R2 of firms decreases. Adherents of the R2 methodology hold that lower R2's imply more accurate stock prices. The results of an instrumental variable estimation suggest that this relationship is a causal one (that is, retail trading 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 trading increases 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"
(April 2010).
University of Michigan Legal Working Paper Series.
Working Papers 2003-2010.
Working Paper 75.
http://law.bepress.com/umichlwps/olin/art75
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