Limiting internet searches for investors increases stock market crash risk by 19%, a new study has found.
The research by RMIT University looked at the ramifications on the stock market following Google’s withdrawal from mainland China in 2010.
It found access to unbiased information about companies’ performance – aided by unrestricted internet search results – led to investors making more informed decisions.
On the flip side, search results manipulated to show overly positive information led to stocks for those companies being overvalued temporarily, increasing the stock market crash risk by 19%.
The study has been published in the Journal of Financial Economics.
Lead researcher Dr Gaoping Zheng, a lecturer in finance at RMIT, said the study showed search results influenced decisions, a challenge to previous thinking that they merely justified people’s existing ideas.
“Until now it’s been widely thought that unrestrictive internet searches result in bias and an overvaluation of stocks but that would mean restricting search would decrease stock market crash risk. Instead, we saw a significant jump,” Zheng said.
“This suggests internet searching does not exacerbate investors’ biases – instead, it facilitates their ability to access and analyse information.”
The research has implications for Australia following Google’s recent attempt to withdraw from the country.
“While China has alternative search engines, their results are concentrated and an identical search on Google would show vastly different results.” Zheng said.
“Our research emphasises the importance of access to diverse results and if Google did decide to withdraw, it could have a destabilising impact on the economy.”
Comparing China during and after Google
In 2010, Google unexpectedly withdrew its searching business from China, reducing investors’ ability to find information online.
To measure the impact, researchers divided a list of Chinese firms into two groups: firms that had a high search volume on Google prior to 2010 and firms that were not regularly searched for on Google prior to 2010.
By averaging the stock price cash risk of both groups after Google withdrew and comparing their standard deviation, the researchers found firms that were regularly searched for on Google were 19% more unstable.
