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 R 2 metric of share price informedness, contributes to the debate by demonstrating that as the proportion of trading by individual investors increases, the R 2 of firms decreases. Adherents of

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... R 2 methodology hold that lower R 2 '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 R 2 ). Thus, if a low R 2 indeed signifies share price accuracy, the findings of this study provide evidence that, contrary to the received wisdom, retail trading increases share price accuracy.