Research: When investors have internet searches throttled, stock market unstable
/A study has found that limiting investors’ access to free internet searching increases the risk of the stock market crashing by 19 per cent. The new study conducted by researchers at RMIT University looked at the after-effects of Google’s withdrawal from mainland China in 2010.
Researchers found that access to unbiased information regarding a company’s performance, as found with unrestricted internet searches, resulted in investors making more informed decisions. Search results that were skewed to show overly positive information resulted in those stocks being temporarily overvalued, thus increasing the risk of a stock market crash by 19 per cent.
The lead researcher on the project, Dr Gaoping Zheng, an RMIT lecturer, said the results of the study showed that internet search results influenced decisions, which is in contrast to previous beliefs that searches simply justified what people already thought. Dr Zheng said that until now, it was widely believed that unrestricted internet searches resulted in bias and overvaluing of stocks, with restricted internet searches decreasing the risks of a stock market crash.
The project was set up with two groups compared: a list of Chinese firms that have a high search volume on Google prior to the 2010 withdrawal, and companies that were not regularly searched for on Google prior to 2010.
The stock price cash risk of both groups was averaged after Google’s withdrawal from mainland China and their standard deviation was compared. Firms that were regulars in Google’s search results were 19 per cent more unstable.
Chinese investors can still search for information regarding stocks using other search engines, however, they are more likely to receive information with a positive bias. Google shows information from international sources such as Bloomberg, Reuters or The New York Times, free from political constraints, which is not accessible as readily in China, with companies able to largely escape scrutiny by the media.
‘Internet searching and stock price crash risk: Evidence from a quasi-natural experiment’, with Yongxin Xu from Monash University and Yuhao Xuan from Southwestern University of Finance and Economics, is published in the Journal of Financial Economics
(DOI: https://doi.org/10.1016/j.jfineco.2021.03.003).
