46 Pages Posted: 6 Jul 2007 Last revised: 15 Apr 2010
Date Written: April 8, 2010
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.
Keywords: Securities law, behavioral finance
JEL Classification: K2, K42, P43
Suggested Citation: 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: https://ssrn.com/abstract=998093 or http://dx.doi.org/10.2139/ssrn.998093