Abstract

http://ssrn.com/abstract=998093
 
 

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Do Individual Investors Affect Share Price Accuracy? Some Preliminary Evidence


Alicia J. Davis


University of Michigan Law School

April 8, 2010

U of Michigan Law & Economics, Olin Working Paper No. 07-018
2nd Annual Conference on Empirical Legal Studies Paper

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.

Number of Pages in PDF File: 46

Keywords: Securities law, behavioral finance

JEL Classification: K2, K42, P43

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Date posted: July 6, 2007 ; Last revised: April 15, 2010

Suggested Citation

Davis, Alicia J., Do Individual Investors Affect Share Price Accuracy? Some Preliminary Evidence (April 8, 2010). U of Michigan Law & Economics, Olin Working Paper No. 07-018; 2nd Annual Conference on Empirical Legal Studies Paper. Available at SSRN: http://ssrn.com/abstract=998093 or http://dx.doi.org/10.2139/ssrn.998093

Contact Information

Alicia J. Davis (Contact Author)
University of Michigan Law School ( email )
625 S. State St.
Ann Arbor, MI 48109
United States
734-763-2221 (Phone)
734-763-9375 (Fax)
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